FMCG giant Hindustan Unilever Limited, or HUL, wants to buy back its listed shares from the public. It plans to seek an in-principle approval for share buyback from its board, when the board meets, on July 29.

What will this mean for its investors?

It may not mean much because, in the near term, the stock might move up, as buy backs tend to excite people. If HUL chooses to go to a limit of 25% of its networth, it won’t set the stock on fire but it will move up.

HUL networth as on December 2006 stood close to Rs 2,724 crore, so 25% of that would be about Rs 681 crore. When this news was anounced, the maximum number of shares that HUL could have bought was 3.5 crore on its total equity base of 221 crore shares outstanding. So in terms of equity value, HUL's buy-back is not substantial and more of probably a sentiment booster for the stock.

In the near-term, it my lead the stock by Rs 10-15, but longer-term investors may be disappointed.

It is generally taken as a measure of confidence by the management in buying back its own stock, because it considered itself undervalued. The Unilever management feels the stock is undervalued and they believe in the prospects of the Indian FMCG story. Which is why they may be willing to buy-back some of their own stock to create wealth for shareholders.

But, what could be pointed out here is that if Lever is sitting on cash, why would they buy its own stock back? The company has struggled for growth for the last 2-3 years and if there is cash in the bank, it could be used for acquisitions and to grow the business. If they have Rs 700-800 crore of cash to spend, why do they not instead buy Mountain Everest Mineral Water like Tata Tea did a few weeks back, opening up another business for them.

What do analysts say?

Theoretically, aggressive managements, positioned in a market like India, should rather want to grow the business, rather than want to return cash to shareholders. If they find nothing new to put into the business, it may by itself be a negative sign.

Ajay Srivastava of Dimensions Consulting, on his part, lauds it as a sensible move. He doesn’t think there is any operational trigger to the company and that the buy-back would be the only trigger. So he advises, “If you are a short-term player and want to arbitrage on the buyback, the answer is good. But one should remember to get out of it post the buyback.” Because, whatever buyback shares are taken in, the balance share still comes back to the market and your portfolio. So it is a good short-term buy.

DSP ML has maintained a sell on HUL, although they expect a near-term upside on the buy-back plans. According to DSP ML, buy-back is likely to be EPS neutral.

Today at 10:01 AM, Hindustan Unilever is quoting at Rs 203, up Rs 8.75, or 4.50%. It has touched an intraday high of Rs 204.80 and an intraday low of Rs 197.50.

It is trading with volumes of 42,076 shares. On Friday the share closed down 1.82% or Rs 3.60 at Rs 194.25.