India Inc., which rushed to announce share buybacks as stocks fell initially because of the impact of covid-19, is now expected to go slow on this to conserve cash with businesses continuing to be impacted by the nationwide lockdown.
Mint reported on 19 March that several cash-rich companies and their promoters were planning to announce share buybacks to arrest falling stock prices by signalling to the markets that they felt their stocks were undervalued.
Buybacks offer a premium over the prevailing market price, thus making them attractive for existing shareholders to sell their shares.
Several companies, such as Sun Pharmaceuticals Ltd, Dalmia Bharat Cement Ltd, Motilal Oswal Financial Services Ltd, Emami Ltd and Sterlite Technologies Ltd, announced buybacks in the second half of March. However, with the nationwide lockdown now extended till 3 May and the economic growth outlook for the fiscal year looking bleak, the enthusiasm for share buybacks is waning.
The International Monetary Fund (IMF) on Tuesday slashed its FY21 growth projection for India from 5.8% projected in January to 1.9%, holding that the ‘Great Lockdown’ to combat the covid-19 pandemic will throw the world economy into the worst recession since the Great Depression of the 1930s. Also, on Tuesday, Barclays pared its growth forecast for India to 0% for calendar year 2020. As companies see their revenues disappear because of the lockdown, they are opting to prioritize cash conservation over rewarding investors through share repurchases, said investment bankers.
“Buybacks are likely to happen only where people are really flush with cash and there is reasonable comfort on future cash generation. However, the general opinion seems to be that most corporates will be in a cash preserve/cash conserve mode, knowing very well that there is uncertainty, at least in the visible future,” said Salil Pitale, joint managing director and co-chief executive officer at Axis Capital.
“Most businesses have got impacted at the revenue line level itself. It is not about margins getting contracted. It is about your topline disappearing. This means that cash is very crucial and so people will conserve cash,” he said. “As the magnitude of the crisis is sinking in there is an element of conservatism that we expect a lot of corporates to have,” said Pitale.
Another investment banker, who spoke on the condition of anonymity, said he expects at least 50% of the companies considering buybacks will not go ahead with their plans in the current environment.