Reliance Industries: Hour of reckoning

This time, the management of Reliance Industries may have to buy some stock

Given the circumstances, the Reliance Industries (RIL) management had hardly any option but to announce a buy-back of shares at a substantial premium.

That is the only way they can send a strong signal to the market that, in spite of the open war between the Ambani brothers, the business continues to do well and that the stock's current market price is too low.

Significantly, the stock hasn't reached Rs 570 since early April, going up since then to a high of Rs 567 on October 20.

The last time RIL announced a buyback, they didn't buy a single share. This time, however, is likely to be different, with the markets ensuring that they have to really spend hard cash to buy the shares back.

Because of the uncertainty about the family squabble, there is no dearth of investors willing to offload their shares, with many looking at the buyback as an exit option. That's probably why the stock fell despite the announcement.

Analysts point out buying back shares will also send the right signal to the market, and the easiest route would be for RIL to buy back its treasury stock with the Trust.

If they do buy back shares, that will increase earnings per share and buoy the share price. RIL's cash flow, should be enough to take care of the outflow on account of the buy-back, especially since it's unlikely that they will have to buy the aggregate amount of Rs 2999 crore.

The uncertainty surrounding the stock is likely to continue""""although Anil Ambani is completely isolated in the RIL board, he is far from being a spent force.

On the positive side, RIL's third quarter results should be excellent, all the more so because the management will try to show that the family row is not affecting the business.

Pharma MNCs: overvalued?

Stocks of multinational pharmaceutical companies were in the limelight on Monday with the government passing the patent bill ordinance.

The pharma MNCs have been outperforming their domestic counterparts since September 1"" Pfizer has surged approximately 54 per cent, Novartis India has appreciated 48 per cent and Glaxo Smithkline Pharmaceuticals has improved by 30.5 per cent.

The argument for the stocks is simple""""foreign players are expected to introduce several drugs from their overseas portfolio in the domestic market, in the new regime.

But that's not likely to happen overnight. In fact, only in calendar 2007 are big ticket product launches from the multinationals expected, as the viability of new products in India has to be carefully studied.

Also pricing is expected to be a key factor, as the government has repeatedly indicated that it is keen to ensure affordable medicines.

Till their new products come, pharma multinationals will continue with their current portfolio.

But growth in the domestic market has shown signs of sluggishness. In contrast, large local players have been entering new overseas markets, to counter slower growth back home.

So why have multinational stocks outperformed? Large investors are probably betting that over a three-five year horizon, foreign pharma majors will be able to grow their sales and profit faster than Indian players. But is that reason enough for such a large jump in prices today?

India Cements: testing times

India Cements' preferential issue of warrants and debentures, to be placed privately, will result in a badly-needed infusion of Rs 650 crore. The south-based company is leveraged to the hilt""it has a total debt of around Rs 2,000 crore on its books, and the interest outgo is around Rs 11 a share.

The company is in the red ""losses for the June and September quarters totalled Rs 35 crore. The cash inflow will reduce the debt and a corporate debt restructuring scheme, which has seen the stock price move 50 per cent since November, should further help bring down interest costs.

The company is the fifth largest cement producer in India but its plants are located in Tamil Nadu and Andhra Pradesh which are not the most lucrative of markets.

However, the recent uptick in prices in the southern markets to the extent of around 20 per cent, has resulted in the company's sales volumes going up 15 per cent in Q305. Further, its capacity utilisation which was at a low 70 per cent, was up at 78 per cent in October and November.

While there may clearly be some operating and financial benefits to the company from the restructuring and the anticipated increase in the demand for cement, the current valuation at an enterprise value/tonne of $70 appears to be a trifle demanding.

Consider that Madras Cement, which is the most efficient producer of cement in the country with an energy consumption of 72 units a tonne and which addresses the same market as India Cements , trades at a similar valuation.

So though there are chances of the company turning cash positive in the near future, a further infusion of cash possibly through a sell-off of its Raasi and Visaka units, might make the stock more attractive.

With contributions from Shobhana Subramanian & Amriteshwar Mathur