Dr Reddy’s Lab spikes up in trade as board approves buy back

India’s second largest drug maker, Dr. Reddy’s Laboratories informed in a stock exchange filing that the drug major's board had approved a proposed buyback of shares at a price of Rs 3500 per share, representing a 21 per cent premium to their closing price as on Thursday.

Share Buyback basically means the repurchase of outstanding shares by a company in order to reduce the number of shares traded on the market. Tender offer is an offer made by the company to the shareholders to acquire the shares from them at a fixed price. Usually the price offered is at a premium to attract the shareholders to offer their shares.

Dr Reddy’s Lab plans to buy back 44.85 lakh shares i.e. about 2.6 per cent of the total existing paid up capital for around Rs 1569.4 crore. The company’s board has approved a proposal to re-purchase the shares, subject to shareholders' nod, for a price exceeding not more than Rs 3500 per share under the open market route. Kotak Mahindra Bank will be the merchant banker for the proposed buy back.

According to a company statement: "The buyback is proposed on account of the company's strong cash flow position and is expected to be EPS (Earning per Share) accretive, contributing to an overall enhancement of value for shareholders going forward".

The company believes that the stock was underpriced relative to its fundamentals and future potential. Buyback is a way by which a company invests in itself, which is indicative of the management and promoters' continued faith in the future of the company. It signals confidence in the future performance of the company. The primary intention is to reward investors, improve financial ratios (such as price to earnings, return on assets and return on equity), increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence.

Buyback news came as a  result of company’s recent run-ins with the US FDA over alleged violation in 3 of its facilities in India which subsequently led to stock plummeting from the highs of Rs 4386 in early November to touch a 52- week low of Rs 2750 in January, representing a massive fall of 37 per cent over the period.

The decline in the price of the shares has led management to come up with the buyback offer to arrest the fall and build shareholder’s confidence in the company and the business as a whole. The scheme further instils the faith that the management & promoters have in the company which was reflected in the stock price of the company that has bounced back almost 6 per cent in the last two trading sessions.