Reliance Industries: Fix the intention

If Reliance is serious about protecting investor wealth, its buyback should be at a fixed price

Reliance Industries has said that it will consider a buyback of shares, in what is seen as a ploy to support its share price even as things get murkier in the feud between the Ambani brothers.

For now, the strategy seems to have worked - since the announcement yesterday that a buyback would be considered, the Reliance stock has risen 1 per cent, reversing its negative trend.

But experience, from within the Reliance group itself, shows that announcing a buyback and actually buying back shares are two different things.

Reliance Industries had announced a buyback in the year 2000 at a price not exceeding Rs 303, and although the markets presented an opportunity, when the price fell below this level, the company didn't buy back a single share.

More recently, Reliance Energy announced a buyback at a price not exceeding Rs 525, and although its price in the recent past has been below that level no buyback of shares has happened.

In a buyback that is done through open market operations, there is no obligation on the company's part to buy back shares. If the buyback announcement is intended just as a share price prop, it doesn't matter how big the buyback size is.

If the Reliance Industries management is really keen that investors don't see a decline in the value of their investment, it would be better to go for a tender offer.

GlaxoSmithkline Consumer Healthcare did that recently when it announced a buyback of up to 7.33 per cent of its paid-up capital at a fixed price of Rs 370. Being a tender offer, the company is obliged to pay Rs 370 to whoever offers shares, of course subject to the cap of 7.33 per cent.

Of course, a fixed price offer would mean that Reliance would have to set aside substantial funds, unlike a buyback which is done through open market operations, where companies can be non-committal.

BSNL

BSNL's spectacular four-fold increase in profit to Rs 6000 crore in FY04 becomes less spectacular if one were to exclude the Rs 2000 crore it got as a reimbursement of licence fees by the government.

But even excluding that, the profit growth at 175 per cent y-o-y is impressive, as is the revenue growth of 24 per cent to Rs 31,400 crore. GSM services, despite its scorching pace of growth, accounted for just around six per cent of the company's revenues.

The management said its revenues and profits in the current fiscal would be flat. This would be because of the combined impact of the lower ADC charges effected in February 2004 and lower ILD and NLD tariffs. Much of the downside on this account would be taken care of in FY05, which means numbers should look better in FY06.

Any further cuts in ADC charges, though, could dent BSNL's profits even if done in a phased manner and even though the GSM business is growing fast.

In FY04, BSNL added 30 lakh subscribers and it plans to add another 70 lakh this year. That could be a stiff target since it has capacity constraints and given that till November it had added only 29 lakh subscribers.

Oil marketing companies

Advance tax collections in Mumbai have risen approximately 16 per cent in the third quarter, but it has declined substantially for most oil marketing companies. Does that mean that these companies can be expected to perform poorly in the December quarter? Not quite.

Last fiscal, upstream companies like ONGC and GAIL provided their share of the subsidy losses to oil marketing companies for the June and September quarters only in the December quarter, thereby boosting their income in that period.

This fiscal, upstream players have shared the subsidy losses with marketing companies in the respective quarters and this has led to the difference in the amount of tax paid.

On the contrary, the operating environment has improved for oil marketing companies in the December quarter vis-a-vis the September quarter. Marketing margins for petrol, for instance, is estimated at Rs 1.5-2 per litre this quarter, against approximately Rs 1 per litre in the previous quarter.

Even in the case of diesel, margins have grown to an estimated Rs 1-1.5 per litre in the current quarter versus a loss of around Rs 0.2 per litre in the previous quarter. An area of concern however, is the growing subsidy losses for LPG, despite the price hike of Rs 20 per cylinder.

However, with refining margins for OMCs in the current quarter estimated at $7.5- $8 per barrel versus around $7 per barrel in the last quarter, it should provide OMCs with some cushion.

Historically, the government has allowed OMCs to earn higher marketing margins when they have emerged from a margin squeeze. Hence, analysts are forecasting that in the next 12-15 months, marketing margins for OMCs should improve even further.

ith contributions from Mobis Philipose, Shobhana Subramanian & Amriteshwar Mathur