The Union Budget of 2016-17 dealt a nasty blow to individuals, Hindu undivided families and firms if they received dividend exceeding Rs 10 lakh from shares in the financial year. First, there is a corporate tax, then a dividend distribution tax and now this. Actually this translates into triple taxation. As this new levy was applicable from 1 April 2016, there were companies like Reliance Industries Ltd which announced a bumper special interim dividend in March elf to exploit this opportunity. Corporates have found another window of opportunity to avoid this additional dividend tax burden by announcing share buybacks. Good companies where promoters have more than 50% share holding, have sizeable reserves and surplus in their books, good track record of earnings and have a comfortable cash position can choose buyback as a smart option. Investors don’t understand that by enhancing a buyback it actually creates shareholder wealth because if the shares are bought back by the company then the outstanding shares are cancelled and this in turn increases the earnings per share (EPS) to a large extent. Buyback of shares is voluntary and if the share holder decides to participate in the offer then they receive cash in lieu of the shares tendered at the appointed price. This raises the demand for the company’s stock in the market and simultaneously helps promoters retain control over their company. Legally, buyback is in accordance with the provisions of the Companies Act 2013 and the Securities and Exchange Board of India Regulations.
Bharti Infratel Ltd has recently announced a buyback of its equity share for a sum of Rs 2,000 crore through a tender offer method at a price of Rs 450 per share. The intention of the company is to buyback a little over 4.44 crore shares representing 2.34% of the outstanding equity share capital. The buyback in this case is a little surprising by the company because it has been trying to deleverage its balance sheet for quite some time. Bharti Infratel (together with Indus Towers) is India’s largest tower player. It has 88,888 towers across 22 cities plus has a 42% stake in Indus which has 1,19,881 towers in the country. To meet the capacity requirements of telecom companies, Bharti Infratel continues to make its tower portfolio denser in cities as strong demand in data is beneficial in the longer term. There has been consolidation happening in the telecom space with players either scaling down their operations or contemplating merging with each other to form larger entities. Bharti Infratel reported decent Q4 FY16 numbers with revenue at Rs 3,162 crore and EBIDA at Rs 1,424.7 crore. While PAT came in at Rs 661 crore leading to better than expected margins. Most analysts believe that data growth is a sustainable long-term story in the country on the back of huge spectrum purchased during past auctions apart from the impending spectrum auction in the near future. Bharti Infratel is a good buy at the current market price of Rs 370 for a target price of Rs 475 in one year time horizon.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.