Sensex Trades Marginally Higher; Vedanta & ICICI Bank Top Gainers

Thu, 21 Feb 12:30 pm

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Share markets in India are presently trading on a positive note. Sectoral indices are trading on a mixed note with stocks in the energy sector, metal sector and realty sector witnessing maximum buying interest while telecom stocks and automobile stocks are witnessing selling pressure.

The BSE Sensex is trading up by 85 points (up 0.3%), while the NSE Nifty is trading up by 26 points (up 0.3%). The BSE Mid Cap index is trading up by 0.5% and the BSE Small Cap index is trading up by 0.6%.

The rupee is trading at Rs 71.17 against the US$.

In the news from the finance space, DHFL share price is in focus today as the promoters of the company have mandated Barclays Group Plc and NM and Rothschild to run a formal process to find a buyer.

As per an article in The Economic Times, holding company Wadhawan Global Capital has initiated talks with more than a dozen financial and strategic investors in India and abroad to sell a controlling stake.

Here's an excerpt from the article:

• Private equity funds including Blackstone Group, KKR & Co and Baring Private Equity besides strategic investors such as Hero Group and Piramal Group have been sounded out for a potential sale. Fullerton India, promoted by Singaporean sovereign fund Temasek Holdings, is another potential strategic investor that has been targeted.

Blackstone acquired Aadhar Housing from DHFL a few weeks ago, while Hero and Baring were in the final fray for the same asset. Wadhawan Global Capital's 39.2% stake in DHFL is valued at Rs 16 billion, sharply down from its peak of Rs 85.2 billion last year.

Last week, the company's Chief Executive Harshil Mehta has resigned. However, the company said in its regulatory filing that Harshil Mehta would continue to be associated with the company and shall hold the designation of Executive President - Retail Business with effect from February 14, 2019.

Besides, the board has recommended appointment of Sunjoy Joshi as an Independent Director and Srinath Sridharan as a Non-Executive Director.

Note that the stock of the company has been witnessing sharp selling pressure lately after Cobrapost said that DHFL diverted funds to shell companies to buy assets, and that firms linked to DHFL's controlling shareholders - the Wadhawan group made political donations beyond mandated levels.

DHFL is also facing questions about its financial health after the IL&FS default pushed up the cost of funds for the mortgage lender and made borrowing difficult. Rating company Care ratings today downgraded ratings on the company's debt worth over Rs 1.2 lakh crore issued by DHFL.

As per an article in The Economic Times, the company revised the rating grade of AAA to AA+ for nonconvertible debentures and long-term bank loans. Commercial papers, short-term debt securities rated as A1+ have been put under credit watch.

The company has decided to divest its stake in Aadhar Housing Finance to Blackstone.

Private equity major Blackstone agreed to buy nearly 80% of affordable homes-focused Aadhar Housing Finance from the financially stretched Wadhawan group.

The group's holding company Wadhawan Global Capital (WGC) will be selling its 70% stake in the company, while DHFL will also be exiting its investment, which is reported to be around 9%.

Besides, with DHFL group companies' debt mess coming under lens, global brokerage Credit Suisse warned that it could trigger a second wave of risk aversion in India's debt mutual fund industry.

A report from the global brokerage stated that DHFL is among the largest borrowers from mutual funds and the aggregate exposure of debt mutual funds to the home financier's securities is Rs 85 billion.

This amounts to about 0.7% of debt mutual funds' assets under management (AUM) as of December 2018.

Furthermore, the exposure for some fund houses is larger, at 2-10% of total debt AUM, with some schemes having up to 30% of their AUM invested in Dewan securities.

DHFL share price is presently trading up by 2.9%.

Moving on to the news from the IT space, Tech mahindra share price is witnessing buying interest today on buyback reports.

The board of the company approved a share buyback proposal of up to 20.6 million shares at a price of Rs 950.

According to reports, the company said that the offer comprises 2.1% of the total paid-up equity capital of the company.

IT companies have been returning surplus cash on their books to shareholders by way of dividends and buybacks. Infosys share price and Persistent systems share price have also approved buyback approvals.

Tech Mahindra share price is trading up by 2.4%.

To know more about the company, you can read Tech Mahindra's latest result analysis on our website.

Speaking of buybacks, the numbers 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.

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

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