FMCG giant Hindustan Unilever (HUL) will consider another share buyback at its meeting on June 11. The company,a subsidiary of the UKs Unilever,had announced its last buyback in 2007.
The company plans to buy back up to 25% of its networth,which amounts to Rs 630 crore. The buyback will enable the UK parent to increase its shareholding in the Indian arm. The buyback will enable the company to improve its return on net worth (RONW) and return on assets (ROA). There could be a marginal impact impact on earning per share,said an analyst.
As per the Securities and Exchange Board of Indias stipulation,a buyback cannot exceed 25 per cent of a companys net worth,ie its paid-up capital and free reserves. The buyback regulations stipulate that the promoters and directors cannot sell their shares in the buyback.
HUL shares rose four per cent to Rs 247.20 on the BSE on Thursday. Typically,buybacks are undertaken by companies which have surplus cash and wish to support their share price. HUL has an estimated Rs 2,000 crore on its balance sheet in the form of cash and liquid investments. Buybacks lead to a smaller equity base for the company,since the shares bought back are extinguished. As such,they are considered a shareholder-friendly exercise,since a smaller capital base drives up earnings per share.
Analysts point out that HUL has not been able to grow its profits meaningfully given the competitive environment,as a result of which earnings growth has been muted. The buyback would,to some extent,help support the share price. According to Sebi rules,a company can spend a maximum of 25% of its total net worth (equity plus reserves) on a buyback in a year. According to Bloomberg data,HULs net worth as of March 2009 was Rs 2,679 crore,indicating that it can spend approximately Rs 670 crore this time.