Hindustan Unilever to go for buyback

TNN / Jul 21, 2007, 00:38 IST

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Hindustan Unilever, the majority-owned Indian subsidiary of Unilever Plc., will consider a buyback of its own shares in its forthcoming board meeting on July 29.

MUMBAI: Hindustan Unilever (HUL), the majority-owned Indian subsidiary of Anglo-Dutch consumer products major Unilever Plc., will consider a buyback of its own shares in its forthcoming board meeting on July 29.
The company, in which its parent owns a little over 51%, may see value in a buyback to either increase its parent company’s shareholding or show better financial ratios in its balance sheet, said industry analysts.
Under the current rules, the company can buyback shares upto 25% of its paid-up capital, now close to Rs 221 crore, and free reserves, now at Rs 2,503 crore, after seeking shareholders’ approval. Analysts rule out a delisting of the stock__one of the sensex constituents__subsequent to the buyback.
This is the first time that HUL is considering a share buyback programme. This route has been adopted by companies like Colgate-Palmolive, Nestle, Cadbury, Britannia, Kodak, among others, in the past, for reasons ranging from purly financial to delisting of shares. A buy back is essentially reverse of issue of shares by a company. Here, a company offers to take back its shares owned by investors at a specified price.

Considering that the public shareholding in HUL stands at a substantial 49%, the sense that analysts have made from Friday’s announcement is that the maker of Lifebuoy, Surf and Lux simply wants to use cash from its reserves to reduce outstanding shares and assets on its balance sheet. This will lead to a better return on capital employed (ROCE), leading to better ratings by analysts for the company.
HUL reported a net profit of Rs 1,855 crore on a turnover of Rs 12,103 crore in 2006, while its return on net worth stood at 68%. Even if the company continues to post similar earnings as in the past, its earnings per share and the P/E ratio would improve after a share buyback programme. HUL’s ROCE declined marginally from 62% in 2005 to 61% during the last calendar year.

HUL's reserves have risen to Rs 2,503 crore in 2006 as compared to Rs 2,086 crore in 2005 and Rs 1,873 crore in 2004.
The HUL share is considered undervalued by analysts and those in the trade. On Friday, its price declined 1.8% to close a little over Rs 194 on the BSE after touching a high of Rs 198. It is trading far off its 52-week high mark of Rs 262.50 (September 2006).
Incidentally, its parent Unilever is also in the midst of a share buyback programme, announced in March this year. The purpose of its share buy-back programme is to provide a flexible route for returning cash to shareholders, over and above regular annual dividends.

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