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Nifty Crosses 11,500-Mark; L&T Surges 4% on Buyback News
Mon, 20 Aug 09:30 am | Rini Mehta, TM Team

Asian stock markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.2% while the Hang Seng is up 0.7%. The Shanghai Composite is trading down by 0.1%. US stocks closed higher on Friday, with the S&P 500 and the Dow Jones Industrial Average extending gains and the Nasdaq turning positive on reports of progress in tariff disputes between the United States and its trading partners China and Mexico.

Back home, India share markets have opened the day on a strong note. The BSE Sensex is trading up by 221 points while the NSE Nifty is trading up by 50 points. The BSE Mid Cap index opened up by 0.7% while BSE Small Cap index opened the day up by 0.4%.

The rupee is currently trading at 70.23 to the US$.

All sectoral indices have opened the day in green with metal stocks and capital goods stocks witnessing maximum buying interest.

In the news from the economy. As per an article in a leading financial daily, India's current account deficit (CAD) is expected to widen to 2.8% of gross domestic product (GDP) in this financial year.

With rising oil prices, a depreciating rupee and outflow of foreign portfolio investments, there are concerns that the current account deficit might rise in the current fiscal year.

Overall, the current account deficit is expected to widen to 2.8% of GDP in 2018-19 from 1.9% in 2017-18.

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The current account deficit, which is the difference between the inflow and outflow of foreign exchange, jumped to US$48.7 billion, or 1.9% of GDP, in 2017-18. This was higher than US$14.4 billion, or 0.6%, in 2016-17.

According to official figures India's trade deficit, or the gap between exports and imports, in July widened to US$18 billion, the most in more than five years. A trade shortfall puts pressure on the current account deficit and is a key vulnerability for the economy.

India's exports rose by 14.3% to US$25.8 billion in July, while imports during the month were valued at US$43.8 billion.

According to report, the downside risks to exports remain due to a weaker global growth outlook though currency depreciation could provide some relief to exporters. On the other hand, import growth, is likely to remain elevated in the near-term due to high oil prices, though a weak rupee and a domestic slowdown could moderate imports in coming quarters.

The rupee has been among the worst-performing currencies against the dollar so far this year and settled below the 70-mark for the first time in history on 16 August on strong demand for the dollar amid the ongoing Turkish crisis.

In our latest edition of the stock market podcast, we have talked about the Turkish crisis and how it can affect your portfolio of stocks. Just visit SoundCloud, iTunes or Stitcher and access our free weekly podcast. Happy listening!

Moving on to the news from the engineering sector. In the latest developemnt, Larsen & Toubro (L&T) on Saturday said its board would consider a proposal for buyback of equity shares next week. If approved, this would be the first-ever buyback by the firm.

If approved, L&T will join companies such as Tata Consultancy Services (buyback size of Rs 160 billion) and HCL Technologies (Rs 40 billion), which have announced buybacks in the last few months.

According to current regulations, a company cannot exceed 25% of its paid-up capital plus reserves while offering a buyback.

According to an article in the Business Stnadard, L&T's net worth (equity plus reserves) stood at Rs 492 billion at the end of the year ended March on a standalone basis. It had debt of Rs 106 billion, while the combined figure of cash and bank balances, investment in quoted government securities, bonds, debentures and unquoted units stood at Rs 87 billion, at the end of the previous financial year.

On basis of these, the buyback could be as much as Rs 123 billion.

For L&T, which has divested from a couple of non-core assets in the past few quarters, a buyback will translate into cash outflows, the reports noted.

In 2017-18, the number of buyback offers 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?

Tanushree Banerjee, Co-head of Research at Equitymaster recently 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.

It's a matter of time before you get to use the cash for buying stocks, you've always wanted to, at attractive bargains.

To know more about the company, you can access to L&T's latest result analysis and L&T's 2017-18 Annual Report Analysis on our website.

L&T share price opened the day up by 4.1%.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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

Read the latest Market Commentary

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