A Rs 10,440-crore buyback plan that was supposed to cheer investors and shore up the stock of Reliance Industries (RIL) may, in effect, turn out to be a dampener when the market opens tomorrow, according to experts.
Analysts tracking Reliance Industries says there is little to cheer about the buyback announcement that the company made on Friday.
RIL’s buyback has come in lower than expectations, notes the assistant vice-president of a Mumbai-based securities firm. “This may not really shield the stock during the next trading session. (The buyback plan of) Rs 10,440 crore is at the lower end and disappointing.”
On Friday, the company’s shares gained 1.04 per cent at Rs 793.35 on a day when the Sensex ended up 95.27 points at 16,739. Since January 16, the stock has risen 11.2 per cent on hopes of the buyback plan.
RIL had, on Friday, announ-ced its plan to buy back up to 120 million equity shares from the open market at a price not exceeding Rs 870 per share.
This buyback amounts to 3.67 per cent of the company’s equity capital. The maximum buyback price represents a nearly 10 per cent premium over the stock’s last closing price.
The consensus in the market was for RIL to buy back shares at a price of about Rs 875, with an allocation of Rs 10,000-15,000 crore.
Analysts feel a 10 per cent premium on the buyback price of Rs 870 will not be attractive for investors who had entered the scrip at much higher valuations. The company, they note, will buy back from the open market price. Thus, investors should not think that their shares will be picked up at Rs 870, the price announced by the company.
The other issue is that when RIL had announced a buyback plan of around Rs 2,500 crore in 2003-04, it bought back shares worth only about Rs 150 crore. Though there is a minimum amount that RIL will have to spend this time, it will be interesting to see how serious it is about the plan. By existing rules, the company will have to mandatorily buy back shares worth Rs 2,610 crore, or 25 per cent of the intended buyback amount. Nevertheless, the undertone appears subdued, are sceptical.
“RIL is just trying to establish a new floor for the stock,” says the research head at a securities firm. “Fund managers are fuming that RIL is not following a tendering process. The buyback is being done in the open market.” S P Tulsian, an independent equity analyst, says he does not see the stock ruling above Rs 750 till expiry (of the January month F&O settlement).
“In fact, we may see it fall below Rs 750 on Monday itself.”
Reliance has treasury stake in two companies, Reliance Chemicals and Reliance Polyole-fins, points out Tulsian. “Since the 120 million shares held in Reliance Chemicals counts as promoter stake, it cannot be bought back. But, the stake in Reliance Polyolefins is non-promoter, so the market is going to question if this will be bought back by the company,” he adds.
Jagannadham Thunugun-tla, head of research at SMC Global Securi-ties, however, believes this buyback will “surely provide the sentimental boost” that the company is ready to buy the shares if the price comes down sharply.
RIL last week posted a 13.6 per cent drop in net profit for the October-December quarter of 2011-12 due to margin compression in refining and petrochemical businesses and lower gas output from its Krishna-Godavari block. The company’s net profit stood at Rs 4,440 crore against Rs 5,136 crore during the corresponding period last financial year. The company’s revenue, however, was up 42.3 per cent at Rs 85,135 crore.
“On Monday, RIL’s stock could open weak,” says Deven Choksey, MD, KR Choksey Securities. “But there would be some stability because of the buyback announcement. In the near term, I don’t expect the stock to fall below Rs 720-730 level.” A dip to Rs 720-730 level means a potential downside of 9.25-7.99 per cent from current levels.
With inputs from Samie Modak
