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Will Government Go The Buyback Route?
Mar 23, 2016

PSU stake sale in a bull market is certainly a good bang for the buck. Stocks generally tend to trade expensive in a bull market and therefore, offloading them makes perfect sense. But what about a bear market? Since Government needs to raise money across market cycles, a bear market could throw spanner in their works. The Government may not want to sell their trophy assets at throwaway prices. This is where stock buybacks come in. Stock buybacks is a great way to raise money in a bear market. Even Warren Buffett is of a similar opinion. He has often said that stock buybacks make perfect sense when a stock sells in the market below its intrinsic value. And this could indeed be true for most good quality PSUs today.

However, there's a second condition that also needs to be satisfied. The company should have enough availability of funds in order to carry out the buyback exercise. Do PSUs satisfy this criterion as well? As today's chart of the day highlights, a lot of PSUs certainly do. Coal India has close to Rs 550 bn worth of cash and equivalents sitting on its balance sheet. Others like ONGC, NMDC and NTPC are no slouches either. We are of the view that most of these companies have enough cash beyond the capital expenditure needs and therefore, buying back should make great sense.

Data source: Business Standard, Capitaline, BSE, NSE, Bloomberg

This Chart Of The Day was published in The 5 Minute WrapUp - How Can Two Ratings Agencies Value the Kingfisher Brand So Differently?

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