Reliance Industries will consider buying back shares for the first time in more than seven years. The plan will be discussed at the company’s board meeting on January 20, when the third quarter results will be announced.
After the announcement, the company's shares gained 4.94 per cent to Rs 776.90 on a day the Sensex ended down 43 points. Reliance has cash and cash equivalents of Rs 61,490 crore.
Analysts say the largest buyback programme in the history of the Indian capital market implies two things. First, the company does not have any significant acquisition plan in the near future. Second, the buyback is being used as a tool to prop up the share price. RIL’s scrip tumbled around 35 per cent in 2011, when the benchmark Sensex was down 25 per cent.
| LARGEST LARGESSE The buyback in numbers Rs 1.61 lakh cr: RIL’s net worth as on Sept 30, 2011 Rs 16,178 cr: The maximum buyback possible, as board-approved buybacks can’t exceed 10% of net worth Rs 850-Rs 900: The maximum buyback price, assuming shares are bought at a 10% premium over Wednesday’s close of Rs 776.90 189 million: The number of shares the company can buy back with its free reserves Rs 4,044 cr: The amount RIL will have to shell out, as Sebi is insisting at least 25% of the offer be completed Rs 84,789 cr: The total cash and investments RIL has to cover this Source: BS RESEARCH BUREAU |
Jagannadham Thunuguntla of SMC Capitals says the buyback will be a strong statement from the company's management that they "feel" the share price in the market is undervalued.
“Assuming about 10 per cent premium, the maximum buyback price may be fixed at about Rs 850 a share. However, the company may choose the maximum buyback price in the range of Rs 850-900 a share,” Thunuguntla says.
The current share capital plus free reserves of the company were about Rs 1,46,000 crore, according to the latest financials on March 31, 2011. If RIL goes for 10 per cent of this amount as the maximum buyback size, it will be about Rs 14,600 crore.
| The 2004 buyback * RIL announced the buyback in December 2004 * Maximum buyback price Rs 570 a share (Pre-bonus) * Size of the buyback programme: Rs 2,999 crore * Buyback completed: Rs 149.62 crore or 5% * Average price: Rs 521.39 Source: SMC Capital |
Analysts say the buyback is a clear signal the promoters think the stock is undervalued.
“The verdict is already out on that one. The stock is up five per cent after the announcement. A buyback is also a signalling mechanism that the management thinks the stock is undervalued. And, the market response has been quick,” says Jal Irani, Division Director & Asian Oil Sector Head at Macquarie Capital and an old RIL tracker.
While maintaining its “neutral” outlook on RIL, Goldman Sachs in a sales report on Tuesday said, “We believe a share buyback would be a positive step in utilisation of a part of RIL’s cash balance of about $15 billion, as the company keeps considering its next driver of earnings growth.” The report adds it’s a better strategy to return some cash to shareholders than invest in unrelated new ventures with uncertain return profiles.
However, some like Sanjeev Prasad, ED & Co-Head, Kotak Institutional Equities, are more circumspect. “We don’t know how much money RIL will commit to the buyback. If it’s a small amount, then it’s insignificant but if it’s a large amount, then the signal will be they are serious about returning money to shareholders and that will be positive. In the recent past, there has been a question among investors that RIL may be generating significant amounts of cash but what are they doing with it? More so, as some of their recent diversifications — in retail, or investments in EIH, the Eenadu deal — have been indifferent or lack clarity.”
Morgan Stanley had similar advice. “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. We do not know the exact amount that would be spent, but in FY 2004 RIL announced it would buy back for $571 million, of which it actually spent just $29 million. In that time, RIL outperformed the market by three per cent in three months from the day of announcement of the buyback,” the FII said in a note.
Irrespective of the buyback size, there is no mandatory requirement that the company will have to buy the entire amount on offer. Reliance had last come out with a buyback programme in 2004. The company had bought back about five per cent of the announced buyback programme then.
