Buyback Bonanza: How India Inc's Repurchase Has Spelt Gains For Investors

In the dynamic Indian stock market, share buybacks have emerged as a prominent strategy for companies to return capital to shareholders. While seemingly beneficial, a closer look at historical data and expert opinion reveals a nuanced picture, prompting investors to consider if a strong buyback history truly signals a "good buy".

Over the past few years, the Indian market has seen a significant increase in buyback activity. In 2023, a staggering Rs 48,452 crore worth of shares were repurchased across 48 instances, followed by Rs 13,539 crore in 2024 (48 buybacks). Even in the current year, Rs 546 crore have already been allocated to five buybacks. This trend highlights buybacks as a favoured mechanism for companies to deploy their excess cash.

The table below highlights companies that have frequently undertaken buybacks, suggesting a consistent strategy of returning capital to shareholders or managing their capital structure. While Ajanta Pharma, Eclerx Services, and SIS Ltd. all show a high frequency of four buybacks, Eclerx Services stands out with an impressive 1,106% five-year return. Conversely, SIS Ltd. recorded a -2% return despite the same buyback frequency.

Major IT companies like Tata Consultancy Services Ltd., Wipro Ltd., and Infosys Ltd. have done high amount of cashbacks in the last five years. TCS, in particular, has allocated a massive Rs 51,000 crore to buybacks, signaling its commitment to returning surplus cash.

Larsen & Toubro Ltd., with a considerably lower buyback amount of Rs 10,000 crore, delivered a much higher five-year return of 303%, compared to the IT giants.

A few companies known for their buyback history include Balrampur Chini Mills Ltd. With three buybacks and a total of Rs 540 crore spent, the stock has yielded a 365% return. Tanla Platforms, with fewer buybacks and a smaller total amount, has achieved an even more remarkable 895% return.

How Does Buyback Benefit Investors?

Companies opt for buybacks for several strategic reasons:

• Returning Excess Cash: Instead of paying dividends, buybacks provide a way to distribute surplus funds to investors.

• Reducing Outstanding Shares: This directly boosts Earnings Per Share as the same earnings are now spread across fewer shares, making the company appear more profitable.

• Creating Demand: A reduction in outstanding shares can create scarcity, potentially driving up the stock price.

• Signaling Confidence: A company repurchasing its own shares often signals management's belief that the stock is undervalued.

The Tax Dimension: A Recent Shift

Until recently, buybacks offered a tax-efficient way for companies to return capital, as the tax burden was primarily on the company. However, the Budget 2024 brought a significant change, as of October 1, 2024. The amount received by shareholders from a buyback is now taxable in their hands at their respective slab rates. This shift warrants careful consideration for investors.