Paytm buyback shows firm believes shares are below intrinsic value, just how Berkshire Hathaway did it in the past

Paytm said that its decision for the same comes from its strong financial position and liquidity.

Paytm, India's leading mobile payments and financial services company, has informed the exchanges about its plans to buyback shares as its management believes that it will be beneficial for its shareholders. The company said that its decision for the same comes from its strong financial position and liquidity. A board meeting will be held on December 13 for the approval of the company`s first ever share buyback.

Paytm's announcement has been welcomed by investors and analysts as the company`s stock surged sharply during Friday's trading session.

While the details of the buyback will be disclosed by the company after the board meeting, social media is already abuzz with speculations about Paytm`s move, with some even comparing the company`s proposed move to Warren Buffet`s Berkshire Hathaway, a top US multinational conglomerate.

A Twitter user pointed out how Paytm`s proposed buyback move is quite like how Berkshire Hathaway has done it in the past, at a point when management believes shares are under their intrinsic value and its cash reserves aren`t greatly impacted. It may be noted that Berkshire Hathaway is an investor in Paytm.

The user also attached a Berkshire Hathaway release related to share buyback from 2018, which said: "Under the amendment adopted by the Board of Directors, share repurchases can be made at anytime that both Warren Buffett, Berkshire`s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire`s intrinsic value, conservatively determined."

Another reason behind the proposed buyback is Paytm`s strong net cash, cash equivalent and investable balance of Rs 9,182 crore (as of September 2022).

Analysts at Dolat Capital, a brokerage firm, believe that buy back at the current valuation makes sense, given declining need for organic capital allocation and "very compelling valuation for the Paytm business".

"We view this move to be very positive and would enhance business confidence. Maintain Buy with TP of Rs 1,400," Dolat Capital analysts noted.

Paytm made the proposed share buyback announcement after achieving consistently strong growth for multiple quarters due to its strong business model and subsequently rising monetisation from businesses such as payments, devices and financial services.

This is reflected in the company`s strong 76 per cent y-o-y revenue growth at Rs 1,914 crore and 224 per cent y-o-y surge in contribution profit at Rs 843 crore in Q2FY23.