Anil Dhirubhai Ambani Group (ADAG) company Reliance Energy Limited (REL) announced, Wednesday, its board has approved buyback of shares worth upto Rs.2,000 crore ($500 million) in a bid to ward off volatility and speculative activity in its share price and improve the company's valuation.
According to a REL statement, the board has decided to buy back up to 4.5 percent of the firm's fully diluted equity or 25 percent of its net worth in two trenches of Rs.800 crore ($200 million) and Rs.1,200 crore ($300 million).
The maximum price per share has been decided at Rs.1,600 - at 9.6 percent premium to Wednesday's closing price of Rs.1,459.45 or a premium of over 30 percent to Rs.1,225, the lowest price recorded during the calendar year 2008.
The Board of Directors has approved a buy-back of its outstanding equity shares for an aggregate amount of up to approximately Rs.2,000 crore, in two phases, REL said in a regulatory filing.
The buy-back would be made from REL's balances of cash and cash equivalents, it said.
REL said its fully diluted equity capital is Rs.279.53 crore ($69.88 million) and market capitalization is over Rs.42,000 crore ($10.5 billion).
According to the company statement, the reduction in outstanding number of equity shares after buy-back would lead to improvement in earnings per share as well as other financial ratios.
It would also restore confidence of management in future growth prospects, the statement said.
The move would also help in reducing floating stock, leading to an enhanced long-term price performance. However, there would be no impact on leverage ratios as the company is debt-free at a net level, REL said.
The buy-back would be made on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) through open market purchases.
According to a senior REL executive, the buy-back would raise promoter's stake by 1.5 percent to 37 percent on a reduced equity base.
This is the second buy-back offer made by REL. It had announced a buy-back in June 2004 for Rs.350 crore up to a maximum price of Rs.525 per share.
The offer was extended till June 2005 but the company's balance sheet for 2004-05 said no shares were bought back.
REL was the biggest gainer among Sensex stocks in 2007, its shares having risen 307.87 percent in 2007, outperforming the 30-share benchmark index, which rose about 45 percent during the same period. However, in 2008, it has fallen more than 30 percent, compared with a drop of 18.5 percent in the Sensex.
On Wednesday, REL shares closed at Rs.1,459.25, down by Rs.43.20 or 2.88 percent from its previous day's close of Rs.1,502.45. On Friday, REL's share price fell further by nearly 13 percent to Rs.1,270, its lowest close in nearly six months. The markets were closed on Thursday on account of a local religious holiday.
They are doing this basically to create a positive sentiment for the Anil Ambani group companies. Otherwise, buyback per se doesn't make sense, said Shankar Sharma, vice-chairman and joint managing director at First Global Securities.
It is a good price. But it might not have a significant impact on the stock price as the current market outlook is not good, said Amitabh Chakraborty, president of equities at Religare Securities.
However, given the current volatility in the capital market, It is definitely a good price and may act as a support on Reliance Energy's stock price at current levels, Nitin A. Khandkar, head of research at Keynote Capitals Ltd, said.
The market analysts noted that the buy-back move would also lure investors against the backdrop of Reliance Power's dismal performance last month. ADAG firm Reliance Power recorded India's biggest domestic initial public offering (IPO) so far, selling out in less than a minute, but made a shocking debut in the capital market by plunging and closing 17.22 percent below the issue price of Rs.450. The shares have closed above the issue price only once, on Feb. 25, the day after the firm said it would give three free shares to investors for every five they held.
In a separate development, ADAG flagship firm Reliance Communications has filed with the stock market regulator to sell shares amounting to 10 percent of the tower business Reliance Infratel. The sale is expected to raise $1-1.5 billion. It is also considering listing its newly formed Reliance Globalcom unit that owns its international operations.