DLF's buyback desperate attempt to floor share price

After losing more than 71% of its market cap in the past six months, DLF has announced a share buyback, planning to spend Rs 500 crore equivalent to 0.6% equity stake or 1 crore shares getting extinguished.

It can be inferred that the average acquisition price would be Rs500 per share (Rs 500 crore divided by 1 crore shares). which is lower than DLF's issue price of Rs 525.

As per SEBI norms, promoter holding beyond 90% could trigger delisting proceedings. DLF promoters hold 88.17% in DLF. So it can acquire a maximum of 1.7%.

However, a company announces a buyback only when it has excess capital which cannot be reinvested in the business and the company does not have better growth opportunities. We have been hearing reports of a number of projects being delayed because of a lack of funds from the developers. In this liquidity crunch situation, it would be a better strategy to preserve the cash and use it for development of projects. However, the buyback is suggestive of the fact that the company is trying the salvage the dangling share prices of DLF much below the IPO price.

DLF stock has slid 71% off its January peak of Rs 1,225 to reach an all-time low of Rs 350 on Wednesday. Following the buyback announcement, scrips rose 14.7% to close at Rs 423 on the NSE on Thursday. Mostly, companies use surplus cash reserves to buy back shares in order to shrink capital base and enhance earnings per share. But in the case of DLF, as also in the case of a few other Indian companies earlier, a buyback is being resorted to put up a brave front before investors, which may not necessarily work.

Other real estate company stocks have also fallen by over 75% this year. Unitech has lost 75%, while Parsvnath and Omaxe have slid over 80% each. Given the changed economic scenario, most brokerage firms have been revising downwards the net asset value (NAV) as well as target price of real estate firms.