Sensex Trades Marginally Higher; Axis Bank & Tata Motors Top Gainers

Wed, 9 Jan 12:30 pm

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Share markets in India are presently trading on a positive note. Sectoral indices are trading mixed with stocks in the auto sector and IT sector witnessing maximum buying interest while oil & gas stocks and metal stocks are witnessing selling pressure.

The BSE Sensex is trading up by 157 points (up 0.4%), while the NSE Nifty is trading up by 37 points (up 0.3%). The BSE Mid Cap index and the BSE Small Cap index are trading on a flat note.

The rupee is trading at Rs 70.47 against the US$.

In the news from the airlines sector, Jet Airways share price is in focus today as the lenders of the cash-strapped airline, led by SBI proposed a $900 million resolution plan, comprising fresh equity infusion and restructuring of $450 million of its loans.

Reportedly, the final plan will be put in place by the end of January and the lenders are hopeful that the resolution plan will be in force by 31 March this year, which is well before the 180-day period under the Reserve Bank of India's (RBI's) 12 February circular.

Last Thursday, rating agency ICRA downgraded the airline's loan and debenture ratings.

According to reports, ICRA has revised the long-term rating (assigned to long-term loans and non-convertible debentures) to D from C. The short-term rating has been revised to D from A4.

Last month, Jet was in talks with the SBI for raising Rs 15 billion short-term loan to meet its working capital requirement and some payment obligations.

Reportedly, Jet Airways' strategic partner and Middle-east carrier Etihad, which holds 24% stake in the Indian full-service carrier, is likely to provide guarantee for the loan.

The Naresh Goyal-controlled airline, which has posted three consecutive quarterly losses of over Rs 10 billion each since March, already has as much as Rs 80 billion of debt on its books as on September 30. Rating agency ICRA has already cut the rating on Jet Airways borrowing programmes.

To know more about the company, you can access to Jet Airways' latest result analysis and Jet Airways' 2017-18 Annual Report Analysis on our website.

Moving on to the news from the IT sector, Infosys share price is witnessing buying interest today after the company announced its board will consider a buyback programme and payment of special dividend, among other proposals, at its meeting on January 11.

Shares of the IT major rose around 3% on back of the above news.

The IT major is coming off a one-year temporary prohibition for the share buyback that ended in December. Last year, the company bought back 11.3 crore shares at 1150 per share, amounting to 130 billion.

Reports state that some of the founding family members could also tender shares in the buyback. The share buyback could happen at around 20-25% premium to the current market price, according to news reports.

As per an article in The Economic Times, the buyback could be executed faster this time.

Here's an excerpt from the article:

• The company's successive buyback, subject to shareholder approval, could be executed much faster this time around as Infosys has voluntarily delisted its American depository shares from the Euronext Paris and Euronext London exchanges in March.

To know more about the company, you can read Infosys Q2FY19 result analysis and Infosys Annual report on our website.

Speaking of buybacks, the number of buyback offers in 2017-18 were at an all-time high. Never, in the last two decades, had Indian markets seen fifty-nine companies announcing buyback plans.

But what is truly surprising is that unlike in the past, the buybacks this time seem skewed in favour of short term investors rather than long term ones.

Who Benefits from Such Buybacks?

Here's what Tanushree Banerjee, Co-head of Research at Equitymaster, wrote about it in The 5 Minute WrapUp...

• Look at the history of buybacks since 2002. Logically promoters should offer to buyback shares at a premium when the stock is undervalued. And this logic held true until recently. The number of buybacks peaked when market valuations were low. And in times of peak valuations (like 2007 and 2011), promoters refrained from doing so.
  
  But not this time. The trend of rising buybacks in the last two years, resembles the sentiment of a momentum investor. The appetite to buy shares kept rising with the rising markets. And the latest buybacks of stocks like TCS and MOIL, came at a time, when neither the broader index (Sensex) nor the stocks themselves, are undervalued.

At Equitymaster, we believe, as a shareholder in cash rich companies, you should not only be wary of expensive buybacks. But if possible use it to your advantage to rake in some cash.

As per Rahul Shah, co-head of Research, investors should not assume buybacks are always good. Here's an excerpt of what he wrote in one of the editions of The 5 Minute Wrapup:

• The reason behind the buyback must be investigated. At the end of the day, an increase in earnings should be more a function of the inherent robustness of the business, as that's what will help it continue to grow at a healthy pace.

The topic also brings us to ask: Do buy-backs offer an arbitrage opportunity for retail investors? Ankit Shah has answered this question in one of the editions of Equitymaster Insider. You can access the issue here (requires subscription).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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