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Buybacks come to funds' rescue

Aabhas Pandya

The spree of open offers and buybacks unleashed by India Inc has brought a glimmer of hope for harried fund managers.

With domestic companies and multinational parents acquiring shares at a reasonable premium, funds with holdings in India will benefit if they sell it to the acquirer.

Two, the spurt in stock prices is expected to funnel some gains to the depressed net asset values (NAV). Add to it, the buyback fever has already started to rub on other "suitable" candidates that own surplus cash with beaten down stock prices.

Domestic companies are largely aiming at improving shareholder value since share prices stand sharply eroded. Apart from giving a boost to the stock price, buybacks help promoters hike their stake to thwart any takeover attempts.

On the other hand, open offers from foreign parents of Indian arms are targeted at converting them into wholly owned subsidiaries.

Yet, fund managers are cautiously optimistic on expected gains. The current round of share buyback is largely confined to mid and small cap holdings, where funds have insignificant investments.

Thus, even if funds were to respond to the buyback or open offer, it will translate into marginal returns. Even some of the stocks with reasonable market cap like Bajaj Auto, Castrol and Indian Rayon, which hit the market with repurchase offers, are now out of favour with fund managers.

"Most of the Indian subsidiaries like Castrol, Sandvik, Philips and Carrier Aircon with open offers have deteriorating fundamentals and have been milked by their foreign parents. Thus, funds anyway only have marginal holdings here," says Prashant Jain, head of investments, Zurich India Mutual Fund.

"These open offers will help only when large cap companies announce them," he adds. Little wonder then, MNC dedicated funds from Kotak, Birla and UTI have seen only a marginal appreciation in NAV in the last one week.

On the other hand, some fund houses have been selling their holdings under buyback proposals. For instance, UTI recently offloaded 1.44 lakh equity shares of Rhone-Poulenc to Nicholas Piramal India and NPIL Fininvest in response to their cash offer.

Funds had also responded positively to the Siemens' offer, which is widely held with a reasonable investment. Buybacks also have an indirect benefit since they reduce the supply of stock in the market and give more cash to equity investors.

The string of repurchase plans may not mean much for most funds. Yet, it still provides an incremental boost to the NAV in a bearish market. For in hard times, even a penny earned is equivalent to a pound!

Source: Value Research

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