RIL buyback may not be enough to boost stock given weak numbers

Written by fe Bureau | Mumbai | Updated: Jan 21 2012, 05:59am hrs
Reliance Industries (RIL) said on Friday it would spend up to R10,440 crore to buy back 120 million shares from the open market at a maximum price of R870 per share. The buyback price is at a 10% premium to the closing price of the stock on Friday of R793.50. Should the company buy 120 million shares, its equity would be lower by 3.6%. RIL, the Indias largest company by market capitalisation, has cash balances of R74,500 crore on its books.

While the buyback amount is fairly meaningful and equals 6.9% of the company's net worth (equity & reserves) of 1.51 lakh crore as of March 31, 2010, the Street was not sure how much of a support the stock would get since as per the rules the company need to buy only R2,610 crore worth of shares. Moreover, they point out that the stock could be under pressure because of the disappointing numbers posted by the company for the three months to December, 2011. Nonetheless, the amount announced cannot be construed to be a token sum, said an analyst, adding that it appeared that the company did want to return cash to shareholders rather than just provide a floor for the stock.

Others felt the ceiling price could have been a tad higher. The market was expecting a price of closer to R900 a piece which would have created some excitement in the stock and compensated for the weak numbers. When RIL announced a buyback in December 2004 the price was at 11% premium to the then closing price. However, RIL bought back just R150 crore worth of shares compared to the announced amount of close to R3,000 crore.

RIL has underperformed the market each year since 2008. In the last two years, the RIL stock has underperformed market by an average of 15%; in 2011, the stock plunged 34% against a 25% decline in the Sensex.

RIL reported a net profit for the December 2011 quarter of R4,440 crore, a fall of of 13.5% y-o-y while the consensus expected a fall of 11% to R4,550 crore. While the EBIT (Earnings before interest and tax) margins for both refining and petrochem businesses saw a sequential (q-o-q) decline, the biggest disappointment came in the form of a decline in the companys gross refining margins (GRM).

At $6.8 per barrel the December quarter GRM was significantly lower than $10.1 per barrel reported in the September quarter. On Wednesday after RIL announced that it would mull a buyback, Morgan Stanley urged shareholders to use the buy back opportunity to get out of the stock, according to Reuters.

The brokerage, which had put an underweight rating on RIL, said it felt the move was a short-term positive for the stock, but added, we would use this opportunity to get out of the stock considering the weak outlook for all its three core division.

According to Sebi norms, a company is allowed to buy back up to 10% of its net worth through a board resolution within one year of resolution. Of late, Sebi has been keeping a track of buybacks announced and expects companies to remain active in the buyback window for the stipulated period. It has also suggested companies to provide a minimum commitment for buy-backs, as seen from recently concluded buybacks like that of Zee Entertaintment and Reliance Infra, which ranged between 22 to 25% of the offer.