Paytm Buyback and Infosys Buyback - Are they Aligned With Shareholders Interests?

Buyback activity has been buzzing for a long time. So far this year, 51 companies have announced buybacks worth Rs 375.2 billion (bn).

This compares with 42 companies announcing buybacks in 2021 and amounting to Rs 143.4 bn, according to data furnished by PRIME Database.

One of the main reasons for the increase in buybacks is the fall in valuations.

So, to instill confidence in investors and return value to them while still making prudent use of funds, management of many companies are choosing buybacks.

The Indian stock markets are excited about yet another big buyback - Infosys buyback worth Rs 93 billion (bn).

Infosys had initially announced the buyback plan on 13 October 2022 when it declared its Q2 results. This will be the Bengaluru-based IT company's fourth buyback.

Infosys had also announced an interim dividend of Rs 16.5 per share at that time. All this is in line with Infosys' payout policy to return 85% of its free cashflow to shareholders for the next five years.

Infosys Mode of Buyback

The buyback is an open market offer via the stock exchange.

Under the open market route, the company purchases shares directly from the market. The open market makes no legal obligation on a company to complete its buyback program.

Now you may ask what's the record date for Infosys 2022 buyback?

Well, there is no concept of record date in case of the open market mechanism through stock exchange.

Details of Infosys Buyback

1) The total buyback size is worth Rs 93 bn representing approximately 1.19% of the total paid up capital or 50 million (m) shares.

2) The price for tendering shares would not exceed Rs 1,850 per share. Infosys current market price is Rs 1,552 as of 15 December 2022.

3) If you do tender shares in the buyback, the trade will get executed at the offer price or lesser only when the price offered matches with the buy order placed by the company.

4) The buyback opened on 7 December 2022 and will continue till 6 June 2023.

5) The IT major bought back shares worth nearly Rs 2 bn on the first day, as per its regulatory filing.

Last week on Wednesday, Infosys revealed that the company bought back 25,000 shares on BSE and 1.22 m shares on NSE at an average price of Rs 1,615.54 apiece.

According to reports, Infosys has also allowed American Depositary Shares (ADRs) to convert into equity shares.

Infosys Share Buyback

Buyback Price (Rs per share)	Rs 1,850
Current Price (Rs per share)	Rs 1,552
Buyback Premium (%)	19%
No of shares proposed for buyback (million)	50
Buyback as proportion of total equity (%)	1.19%
Buyback aggregate amount (Rs billion)	93
Buyback method	Open market route

Data source: Equitymaster

Now let's take a look at yet another buyback by a fintech company, which investors seem more excited about - Paytm.

Details of Paytm Buyback

Earlier this week on 12 December 2022, One97 Communications, the parent company of Paytm, approved a share buyback plan.

Ideally, this announcement should have improved sentiment around the stock as Paytm share price was falling ever since it listed on bourses. There was no stopping its shares from going down as some or the other concerns kept piling up.

But the market was left disappointed even as Paytm announced buyback at a hefty premium. It slipped over 3% in the next trading session.

Here are the key details about Paytm's buyback:

1) The total buyback size is worth Rs 8.5 bn representing approximately 1.62% of the total paid up capital or 10.5 m shares.

2) The price for tendering shares would not exceed Rs 810 per share. Paytm's current market price is Rs 534 as of 15 December 2022.

3) Like Infosys, Paytm too has opted for the open market route and will complete the buyback within a maximum period of 6 months.

4) The fintech company in its exchange filing said that its board has determined that there is surplus liquidity that can be "productively applied to a buyback of shares".

5) The company also clarified that proceeds from its initial public offering (IPO) are "not being directed towards the share repurchase plan".

6) The company's directors and key management personnel will not sell shares during the buyback period.

Paytm Share Buyback

Buyback Price (Rs per share)	Rs 810
Current Price (Rs per share)	Rs 534
Buyback Premium (%)	51%
No of shares proposed for buyback (million)	10.5
Buyback as proportion of total equity (%)	1.62%
Buyback aggregate amount (Rs billion)	8.5
Buyback method	Open market route

Data source: Equitymaster

Since buybacks interest you, check out our editorial on 5 companies that could announce big buybacks.

Infosys and Paytm Buyback - Two Contradictory Tales

For Infosys, the buyback offer might provide some respite to the shareholders as IT stocks are falling and Infosys is no exception.

IT companies are usually sitting on huge amounts of cash and they reward shareholders by buybacks. Wipro, Infosys, TCS, and other IT companies have carried out multiple buybacks which have provided decent returns to their shareholders in the past.

While declaring its Q2 results, Infosys management did raise its FY23 revenue growth guidance range from 14-16% to now 15-16%, while revising its margin guidance to 21-22%.

For Paytm, many experts are calling its buyback move as a 'sign of confidence'. While some are saying otherwise.

Some reports say this activity is just for creating buzz so the stock price could potentially move higher to its buyback price. As this is a buyback through open offer route, it will go on for six months.

What if the company plans to differ the buyback in the coming months?

There have been instances in the past where the company withdrew its buyback plan. PC Jewellers withdrew its buyback in July 2018 after it failed to receive the requisite no-objection certificate from its bankers. What followed was a 20-25% correction in its share price.

Later in the next couple of months, Vakrangee and Kwality also came out with their buyback plans to put an end to the drop in their share prices. What followed was both companies disappointing investors and withdrawing their buyback plans.

Coming back to Paytm's buyback...there are more red flags.

Co-head of Research at Equitymaster Tanushree Banerjee wrote this in her editorial back in 2018:

• One of the criteria by which we judge managements is their capital allocation skills. In other words...how they deal with excess capital. Markets reward businesses which return surplus capital to their investors and punish businesses which retain surplus capital. That is why companies with consistently high dividend payout ratios typically trade at a premium.

Does the loss making company's move of using cash on books for buying back shares and not using it for growth instead, considered as misallocation of funds?

Tanushree goes on to add,

• When a company's stock is undervalued, buyback makes more sense than dividends. Since the shares bought back are immediately cancelled, the buyback increases the fair value of the outstanding shares. When a stock is fairly valued, or over-valued, then dividends may make more sense than a buyback.
  
  But then, economic rationale, is not the only reason why managements decide to buy back shares. Some companies may buy back their shares, even though they are overvalued.
  
  What makes economic sense for the promoters, may not make economic sense for other investors. Doing so results in a transfer of wealth from shareholders who do not sell their shares to the company at the overvalued price to the shareholders who do.

You can read the entire editorial here: TCS' Big Buyback Plan Cements My Prediction.

Another red flag was recently pointed out by proxy advisory firm Stakeholders Empowerment Services (SES). It said that this step by Paytm will favour shareholders who had invested in the company before the IPO in November 2021.

Here's an excerpt of what SES wrote:

• The buyback, even if SES takes the statement of the company with a pinch of salt, that only pre-IPO funds will be used, will allow all investors to cash out. IPO investors would be getting almost 25-30% of their cost whereas some pre-IPO investors would be getting more than 1,000 times their investment.

Also, Paytm says that they have a 'clear path to cash flows' for managing this buyback and won't use IPO proceeds. But the important thing is Paytm is still running in deep losses. It continues to report losses every passing quarter or years.

As negative clouds continued to linger for Paytm and it has a long way to go before reporting profits and reaching its IPO price, there is some respite at the moment. Shares have gained around 7% in December 2022 so far.

Earlier this month, Paytm gave some relief to investors with its Q2 update. Paytm saw an 8% sequential increase in its loan disbursals and said there's ample room for growth ahead.

Here's an excerpt from its Q2 earnings call:

• While our loan distribution business has scaled significantly in the last few quarters, our penetration level for each product remains low, and gives us a long growth runway ahead.

It remains to be seen how both these buybacks pan out in the coming months.

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