In the calendar year 2023, more than 40 companies have announced share buybacks with a combined issue size of approximately Rs 47,500 crore. Among these, three companies have declared buybacks with an issue size exceeding Rs 10,000 crore. These prominent names include TCS with a buyback of Rs 17,000 crore, L&T at Rs 10,000 crore, and Wipro with a buyback size of Rs 12,000 crore.
In 2022, there were four buybacks exceeding $1 billion (equivalent to Rs 8,000 crore or more). Two of these were initiated by TCS, one by ACC Limited, and another by Infosys.
Infosys recently completed a share buyback worth Rs 9,300 crore in February 2023, even though the offer was opened on December 7, 2022. Additional notable buybacks in 2023 include those by Piramal Enterprises at Rs 1,750 crore, Hinduja Global Solutions at Rs 1,020 crore, Indiamart Intermesh at Rs 500 crore, and Triveni Engineering at Rs 800 crore.
Share buybacks are strategic maneuvers where companies repurchase their own outstanding shares from shareholders either through tender offers or in the open market. The primary goal of these buybacks is to increase the value of the remaining shares and signal positive growth prospects. Generally, buybacks have the effect of driving up a company’s share price as the number of shares available in the market diminishes, impacting supply and demand dynamics.
Deepak Jasani, Head of Retail Research at HDFC Securities, explains that companies typically repurchase shares when they believe their stock is undervalued. They utilize surplus cash reserves, which are not immediately needed, to buy back their own shares. This enhances the ownership proportion of existing investors and bolsters earnings per share (EPS) and return ratios. Moreover, buybacks are often more tax-effective for both companies and shareholders compared to dividends.
Under the current taxation rules, gains from buybacks are taxed at 23.296% at the company level, and shareholders are exempt from tax under section 10 (34A) of the Income Tax Act. In contrast, when it comes to dividends, shareholders are taxed based on their applicable slab rates, which range from 34.3-39% for high-net-worth individuals (HNIs), including promoters.
Jasani emphasizes that as long as this tax rate difference persists, buybacks could be the preferred method of returning cash to shareholders compared to dividends. Shareholders can make decisions about selling their shares in buybacks based on their expectations regarding the company’s revenue and earnings growth in relation to current valuations.
TCS, a prominent IT giant, has taken the lead in implementing share buybacks. Recently, TCS announced a share buyback worth Rs 17,000 crore at a price of Rs 4,150 per share, representing a premium of around 15% compared to the prevailing price. The company, currently valued at approximately Rs 13 lakh crore, has repurchased shares worth Rs 66,000 crore in the past four similar exercises.
Experts believe that TCS’s buyback plan will likely provide technical support until the closure date, thus assisting TCS in outperforming the Nifty IT index by 2-4%. However, due to revised revenue growth assumptions, some brokerage firms have adjusted their earnings per share (EPS) estimates for FY24-26E by 3-5%. For instance, ICICI Securities has lowered its 12-month target price to Rs 3,708, indicating a 3% potential upside, compared to the prior target of Rs 3,869.
Kotak Institutional Equities has also expressed the view that the buyback will offer support to TCS’s stock price in the near term.
In summary, share buybacks continue to be a significant strategy in the corporate landscape, providing benefits to both companies and their shareholders, with tax efficiency being a key driver behind this trend.
Prominent Buybacks in 2023:
- TCS: Rs 17,000 crore
- L&T: Rs 10,000 crore
- Piramal Enterprises: Rs 1,750 crore
- Wipro: Rs 12,000 crore
- Hinduja Global Solutions: Rs 1,020 crore
- Triveni Engineering: Rs 800 crore