DSIJ Mindshare

Share buy back for PSU stocks ; How will it help in divestment process?

In his budget announcement Finance Minister Arun Jaitley hinted at more efficient use of financial resources for PSU by addressing issues on capital structuring , bonus issue of shares and dividends etc. According to news reports,  GOI, now is mulling for a series of buy back of shares by several of its CPSEs viz., NTPC,MOIL, NMDC, Coal India and Oil India.

What has been noticed by market observers in last few days is the extravagant number related to buy back of shares declared by various privately held companies. Recently, in 2016 alone , at least eight privately held companies have declared buyback of shares and the list includes names like  Bharti Airtel, Bharti Infratel, Wipro, On Mobile Global and Dr. Reddy's. A total of Rs. 7,700 crores of buy back was announced in 2016 alone, so far. 

Private companies have often been seen as savvy with its financial management techniques. Indeed with smart financial management and optimal capital structure the private companies have been able to add value to its shareholders on numerous occasions by adopting financial engineering techniques such as share repurchase , dividends and bonus shares etc.

GOI wants its cash rich companies to improve their intrinsic value and possibly lead the share prices higher, thus rewarding existing shareholders because that is exactly what  a "share buy back" does,  at least in theory. There is a huge cash surplus with several CPSEs estimated to be around 2.6  lac crores .It is advised by DIPAM  (Department of Investment and Public Asset Management) erstwhile Divestment Ministry, that the cash be leveraged properly instead of simply divesting a cash rich public sector undertaking,  and that the balance sheet be managed professionally. With surplus cash with several CPSEs not earning higher rate than bank rate there can be a strong case for share buy back. Share buy back will help improve the share price of these  CPSEs and improve the instrinsic value of the shares. 

NTPC has been an underperformer with 1 year returns being at negative 9.75 percent and YTD returns at negative 4.75 percent. Oil India has underperformed both the sectoral indices and BSE Sensex. On a 1 year basis the stock has generated negative 26.75 percent and on YTD basis the stock is down by 13.30 percent. Over a 3 year period the stock has generated negative returns of 15.44 percent. Coal India , yet another CPSE divestment candidate ,is down by 22.35 percent on a1 year basis . On YTD basis the stock is down by 12.66 percent. Over a three year period the stock has generated negative 2.78 percent returns. NMDC another public sector undertaking with huge pile of cash has fared well on the bourses on YTD basis by delivering 6.34 percent returns. However on 1 year basis the stock has delivered negative returns of 25 percent. MOIL, another PSU undertaking in the minerals sector has outperformed the benchmark index i.e  BSE Midcap Index and its sectoral peers on both YTD basis and on a 1 year basis. On YTD basis MOIL is up by almost 13 percent and on a1 year basis the stock is down by 3.4 percent. 

It will be interesting to see if the share repurchase programme if executed will help ramp up the prices of shares of these CPSEs and lead to higher collections from divestment program as and when executed. 


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