Reliance Industries to consider proposal to buy back shares; shares leap by 5%

MUMBAI: Cash-laden Reliance Industries rekindled a buying frenzy in its falling stock, announcing its board will meet on Friday to consider a proposal to buy back shares.

The stock leapt almost 5% on Wednesday, increasing shareholder wealth by 11,950 crore to 2.54 lakh crore. The scrip had fared worse than the BSE Sensex, losing over a third of its value in 2011 when the benchmark index lost 25%.

The Reliance Industries (RIL) scrip also regained its pole position in the Sensex on Wednesday, pipping Infosys. RIL now represents 10.27% of the index, with its share price closing at 776.90.

If the board clears the proposal, RIL's buyback, coming after seven years, may rank as the biggest in India's stock market history. Market sources anticipate the company to commit 10,000-15,000 crore in the buyback.

Sebi guidelines allow companies to buy back shares worth up to 10% of its paid-up capital and free reserves without a shareholder resolution. This can go up to 25% with shareholder approval.

"What this buyback means is that the management is not happy with the prevailing share price and/or is keen to return money to shareholders," Sanjeev Prasad, co-head, Kotak Institutional Equities, said. "The quantum of funds set aside for the buyback will be a crucial factor for the stock price.

It has to be a significant corpus for investors to take notice," the analyst, who has tracked RIL closely and critically for several years, added.

RIL had announced a 3,000-crore buyback programme in 2004-05, but bought shares only for 150 crore.

This time, to communicate an honest intent to return substantial cash to investors, RIL needs to come out with a meaningful offer and follow through with actual buyback, said Jigar Shah, senior vice-president and head of research at Kimeng Securities India. "Current regulations ensure that a company spends at least 25% of the announced offer size, that too within 35-45 days."

RIL's cash balance was 61,490 crore as on September 30, 2011.

Since then it has received a $7.2 billion up-front payment from BP as part payment of its deal to sell a 30% stake in 21 exploration assets, including the KG-D6 block. It is also entitled to get $1.8 billion more depending on future exploration success. RIL's net debt-to-equity ratio stood at 0.06 in September, indicating the total outstanding debt was only slightly higher than the cash balance.

The buyback is seen as an attempt to assuage investor sentiments as Mukesh Ambani and his team try to solve a peculiar conundrum where existing businesses are spewing out far more cash than what the company can invest in existing or new businesses. Idle cash pulls down shareholder returns and is seen as one reason for the scrip's poor performance in 2011.

After completing its two mega projects - development of the KG-D6 block and the second refinery at Jamnagar - the company's cash-earning capacity has improved substantially. In the last two financial years, FY10 and FY11, RIL's cash flows from operations have remained higher than its capital investments, according to its audited consolidated cash-flow statements.