As Reliance Industries Ltd (RIL) begins the largest ever buyback programme in the history of the Indian capital market tomorrow, analysts are divided over the impact it would have on the company’s fortunes in the stock market.
RIL announced on January 20 the Rs 10,440-crore buyback plan, its first and largest in seven years. The buyback would start tomorrow and close on January 19 next year. Citigroup Global Markets and DSP Merrill Lynch are the managers for the offer.
RIL’s board of directors approved the buyback of up to 120 million fully paid-up equity shares of Rs 10 each, at a price not exceeding Rs 870 apiece, payable in cash, up to an aggregate amount not exceeding Rs 10,440 crore, from the open market.
The RIL scrip has gained just 2.78 per cent from Rs 793.35 on January 20, in line with the Sensex movement.
In a report, IDFC said while the action was a positive, with a minimum obligation to purchase at least 25 per cent of the stated amount, this alone was unlikely to boost the stock price materially.
“The purchase of shares from the open market will reduce the share capital, increasing return on capital employed/ return on equity, as well as the earnings per share, but in the absence of material positive news flow around the core businesses of refining, petrochemicals and exploration and production, the likely impact could only be temporary for the stock,” said the IDFC report.
However, Nomura Equity Research said the buyback would support the stock in the near term. “Even if RIL were to buy back the entire 120 million shares, with a large cash balance of $14 billion, the resultant outgo of $2 billion is not a concern. Any substantial buyback would also be earnings-accretive, in our view,” said the report.
Goldman Sachs said the share buyback was a positive step in utilising part of RIL’s cash balance of about $14 billion, or Rs 74,539 crore, as the company was still considering its next driver of growth. “If we assume the whole amount of Rs 10,440 crore is spent at a buyback price of Rs 870 per share, it would add about one per cent net to the earning per share and result in return on equity improvement of 25 basis points from 2012-13 estimates,” Goldman Sachs said.
