CFOs At The Crossroads: Budget Impact, Buybacks And Strategic Challenges

You are probably familiar with the lead actors in the recent budget, such as capital gains taxes, income tax slabs and standard deductions. However, it’s important not to overlook another significant but less spotlighted player in this financial drama – share buybacks. As buybacks surge in the wake of recent budget announcements, Mandar Wagh delves into why companies are increasingly favouring this strategy and the critical role CFOs play in these decisions. At Dalal Street Investment Journal, we are excited to present our special edition dedicated to honouring exceptional CFOs 

All eyes were on the Union Budget recently, the most crucial policy outline, as it significantly impacts the economy, shapes interest rates and GDP, provides direction for various industries, and charts a course for the stock market. Each industry had its wish list for the finance minister, with some desires fulfilled while the others remained unmet. The budget presented a mix of challenges and benefits for investors. The proposed changes drew all kinds of reactions, some positive while others less so. While the removal of the indexation benefit on property sales and higher taxes on equity gains appeared unfavourable, there were positive measures as well.

The exemption limit on gains from equities was increased from ₹1 lakh to ₹1.25 lakhs, and the Long-Term Capital Gains (LTCG) Tax on real estate transactions was reduced from 20 per cent to 12.5 per cent, offering some relief to investors. Among various important announcements regarding employment, infrastructure and tax rates, a key highlight for investors was the revised Basic Customs Duty (BCD) rates on gold, silver and platinum. Finance Minister Nirmala Sitharaman announced significant cuts in import duties for gold and silver bars, which will benefit gems and jewellery companies with unhedged gold.

While analysts and experts had mixed reactions to the budget developments, the markets also responded dramatically. After experiencing a sharp nosedive on budget day due to the significant changes in the Capital Gains Tax framework, the benchmarks swiftly recovered. Nifty 50 even soared to a lifetime high, surpassing the 25,000 level. This optimism reflects a broader belief in the resilience and potential of economy, underscoring a rising confidence in the market’s capacity to adapt to regulatory changes and continue on a path of growth.

Hidden in the Headlines:
Buyback Tax Reforms
One aspect that has received less attention in the headlines is the change in buyback taxability. Previously, the tax on buybacks was paid by the companies conducting them. Under the recent Union Budget, however, this responsibility has shifted to investors, with the income now taxed at applicable slab rates. In the wake of the recent budget developments, Chief Financial Officers (CFOs) are facing significant strategic decisions regarding buybacks. Traditionally, buybacks were a tool to enhance shareholder value by reducing the number of outstanding shares, thereby potentially increasing earnings per share and return on equity.

However, with the new tax rules shifting the tax liability from companies to investors, CFOs must carefully weigh their decisions. Maintaining and enhancing key financial metrics like return on equity and return on capital employed has always been a core responsibility of the CFO. If the company has no immediate use for the cash, it is wiser to return it to the shareholders rather than leaving it idle on the balance-sheet or risking poor capital allocation that could harm return on equity.

If the cash component allocated for buybacks is substantial, it can dilute the weighted average returns, impacting the company’s overall financial performance. CFOs must balance this by considering whether to reinvest the cash in growth opportunities, distribute it as dividends, or execute buybacks. Dividend payments are often viewed as a critical element in a company’s financial strategy. Investors closely monitor dividend payouts, and any reduction or cancellation can be perceived negatively, impacting the company’s stock price and investor sentiment.

Consistent dividend payments signal financial stability and commitment to returning value to the shareholders. In contrast, share buybacks are considered an optional strategy, dependent on a company’s financial health and strategic goals. Unlike dividends, which are expected regularly, buybacks can be adjusted based on the company’s performance and cash reserves. Each option has its implications on the company’s financial health and shareholder value, making the CFO’s role crucial in navigating these decisions under the new tax regime.

Why Companies Choose Buybacks
When shares are undervalued or perceived to be undervalued, buybacks send a clear signal from the company’s management that they believe the shares are mispriced. In such cases, particularly when buybacks are substantial, they can serve as a confidence booster and help achieve more accurate share pricing. Historically, buybacks have been a favoured method for returning cash to shareholders, especially in companies with high promoter stakes. With the new buyback proposal set to take effect from October 1, 2024, the market is witnessing a significant surge in buyback announcements.

Certain companies like KDDL Ltd., Aurobindo Pharmaceuticals Ltd., Welspun Living Ltd., Indus Towers Ltd. and Navneet Education Ltd. have recently announced their buyback plans. At the same time, Dhanuka Agritech Ltd., TTK Prestige Ltd., AIA Engineering Ltd., Savita Oil Technologies Ltd. and Cera Sanitaryware Ltd. are set to convene board meetings to consider launching their own buyback programmes. The proposals that will emerge from these meeting are being anticipated with bated breath. It will be interesting to see how investors respond to these buyback proposals.

Steps Investors Should Consider
In light of the recent developments, investors should carefully evaluate their strategies to navigate the evolving financial landscape. First of all, it is crucial to stay informed about the changes in tax regulations, such as the new buyback tax rules, and assess their impact on investment returns. Understanding how these changes affect individual stocks and overall portfolio performance will be the key. Additionally, investors should consider reviewing their investment choices, particularly in sectors or companies that are actively engaging in buybacks or adjusting their capital allocation strategies.

Monitoring company announcements and financial statements will provide insights into how firms are responding to the new regulations and whether their actions align with long-term growth objectives. The buyback proposals of the companies must be studied in depth and changes to the investment portfolio must be made accordingly. Diversifying investments and consulting with financial advisors can also help mitigate risks associated with market fluctuations and regulatory shifts. Overall, a proactive and informed approach will be essential for navigating these changes and making well-timed investment decisions.

The CFO’s Strategic Significance
The Chief Financial Officer (CFO) plays a pivotal role in the financial success and stability of a company. As the head of the finance department, the CFO is responsible for overseeing all the financial aspects, including budgeting, forecasting and financial planning. This role involves ensuring accurate financial reporting, managing cash flow and analysing financial performance to guide strategic decision-making. The CFO also plays a critical part in risk management, assessing financial risks and implementing strategies to mitigate them.

Beyond these core responsibilities, the CFO is instrumental in shaping the company’s financial strategy and aligning it with the broader business objectives. This includes evaluating investment opportunities, managing relationships with investors and stakeholders and driving cost efficiencies. The CFO’s ability to interpret complex financial data and provide insightful analysis directly impacts the company’s ability to make informed decisions and achieve its growth targets.

Additionally, with increasing regulatory requirements and financial complexities, the CFO ensures compliance with legal standards and adapts to changing financial landscapes. In essence, the CFO is not only a steward of financial integrity but also a strategic partner in steering the company towards long-term success. Acknowledging the contributions of these CFOs is essential. We are thrilled about this opportunity to feature our special edition honouring outstanding CFOs. Let’s explore which CFOs have been recognised in each category and enjoy some insightful interactions with esteemed CFOs from leading companies.

Methodology

To compile the CFO rankings, DSIJ examined the performances of companies listed on the BSE across market capitalisation and sectors. The financial performance was examined over 12 months ended March, 2024 or December 2023 as the case may be. DSIJ evaluated company’s financial performance on twelve metrics. Equal weightage was given to the increase in market capitalisation (includes share price increase and equity issued), growth in sales, operating profit and net profit. Return ratios were also considered for the ranking purpose as well. The segregation of companies into Large-Caps, Mid-Caps and Small-Caps was made based on DSIJ's definition of market capitalisation categorisation. For the purpose of ranking, the best performing CFOs in major sectors and different caps were considered, including one special category for women CFOs.

Click here to download list of CFO awards 2024