In recent decades, share buybacks have become a more popular way for companies to return value to shareholders, compared to dividends. Unlike dividends, a share buyback can change a company’s capital structure, by altering metrics like the number of shares outstanding, earnings per share (EPS), and debt-to-equity ratio. 

Warren Buffet says, “When stock can be bought below a business’s value, it is probably the best use of cash.” Firms tend to buy back their shares when their shares seem undervalued or when there are no other attractive investment opportunities. 

Another advantage of buybacks is that they incur a flat tax rate of 23.3% on the distributed income, while dividends can be taxed up to 37% for shareholders in higher tax brackets, excluding surcharge. This difference makes buybacks more attractive for distributing cash to shareholders.

Buybacks are also an easy way to increase the earnings per share (EPS of companies, due to the lower number of shares outstanding, making this a key reason for companies to choose buybacks over dividends. 

In 2023, 45 Indian companies bought back shares worth Rs 47,932.27 crore, marking a 4X increase since 2021. In this edition of the chart of the week, we will look at how EPS has changed for companies that have bought back more than 5% of their equity share capital since 2020.

Significant outperformance in growth of EPS vs net profit for MOIL, HGS and Engineers India

Since 2020, three Indian companies have repurchased over 10% of their equity shares. In January 2022, MOIL bought back shares worth Rs 693 crore, representing 14.3% of its total paid-up equity share capital. After the buyback, the mining firm’s net profit grew by 5.8%, and its EPS increased by 13.5% in Q4FY22. This shows a clear outperformance of EPS growth over net profit growth by 7.6 percentage points.

Hinduja Global Solutions and Engineers India announced a buyback of 11.4% and 11.1% of their existing equity capital, respectively. Hinduja’s Rs 1,020 crore buyback in May 2023 resulted in EPS outperforming net profit growth by 6.6 percentage points in Q1FY23. 

Consulting services firm Engineers India completed a Rs 586 crore buyback in June 2021, and its net profit dropped by 71.6% in Q1FY21. However, the fall in its EPS (68.3%) was 3.2 percentage points better than the net profit drop for the same period. 

Triveni Engineering & Industries and HPCL also saw EPS growth outperforming net profit after their buybacks. Triveni’s Rs 800 crore buyback (9.4% equity) in February 2023 led to a 29% and 32.8% growth in net profit and EPS, respectively, in Q4FY23. 

Oil refining firm HPCL announced an 8.7% equity buyback in November 2020, aiming to “improve return on equity by reducing the equity base.” After the open offer, the firm’s net profit in Q1FY22 fell by 34.5%. But it's EPS decreased by only 32.3%.

IIFL Securities’ open offer to buy back 5.2% of its equity capital in H2FY21 led to a 52.3% and 54.4% increase in net profit and EPS in Q4FY21, with EPS outperforming net profit. Gujarat Narmada Valley Fertilizers & Chemicals’ 5.5% equity buyback in December 2023 also resulted in slightly higher EPS growth (0.5 percentage points). 

Piramal Enterprises reported a 90.5% decrease in net profit after its 5.9% equity buyback in Q2FY24. However, the fall in EPS is marginally lower at 90.4% a slight (0.1 percentage points) outperformance. 

The outperformance in EPS growth compared to net profit growth post-buyback is significant for companies that repurchased more than 5% of their equity shares without issuing any new shares in the period. IT companies like Infosys, Wipro, and TCS have done buybacks of less than 1.5% of their equity capital and have also issued new shares, which partly offsets the EPS growth outperformance