'Reliance buyback could be largest in history'

The proposed share buyback plan to be considered by the board of Reliance Industries could be the largest ever in terms of size, according to analysts.

“Whatever may be the company's announcement, it is reasonable to expect that this will be largest ever buyback program in the history of Indian capital market, Jagannadham Thunuguntla of SMC Capitals said in a report. According to him, this buyback announcement will be a “strong statement from the company's management that they feel currently the share price in the market is undervalued than the intrinsic worth".

Reliance Industries shares today gained over 4.17% at Rs 771.25 when Sensex ended with a 43 point loss. “Assuming about 10% premium, the maximum buyback price may be fixed at about Rs 850 per share. However, the company may choose the maximum buyback price in the range of Rs 850-Rs 900 per share,” the SMC report said. 

 

The current share capital plus free reserves of compay is about Rs 1.46 lakh crore, as per the latest financials on 31st March 2011. “One can assume 10% of this amount as the maximum buyback size. That is, the buyback size this time can be about Rs 14,600 crore. However, the company may choose the buyback size in the range of Rs 10,000 crore to Rs 14,600 crore,” Thunuguntla said in the report. 

Some analysts advised clients to use the buyback as an exit opportunity. 

"We think this is a short-term positive for the stock, but, we would use this opportunity to get out of the stock considering the weak outlook for all its three core divisions," Morgan Stanley said in a note. 

Whatever may be the buyback size the company may announce, the investors shall remember that there is no mandatory requirement that the company shall buy the entire amount of buyback.

Though with Rs 85,000 crore of cash on the books, the company is endowed with strong muscle to complete the buyback program, it need not necessarily complete it. 

Reliance had last come out with a buy back programme in 2004. The company had bought back about 5% of the announced buyback program then, according to analysts. 

“Considering huge expansion plans that company is lining up in the oil and gas, telecom, retail, etc, the company may wish to preserve as much cash as possible to finance the expansion plans,” SMC Capital said.