Observations:
1. Reliance has announced that the company is mulling a plan for "buyback" on 20th Jan, 2012.
2. Being the "buyback" program coming from the largest company of India, it naturally creates excitement and interest amongst market participants. In that backdrop, an effort is made in this report regarding this "buyback" announcement.
3. Last time, Reliance Industries has announced the buyback in December 2004. So, it was about 7 years ago. While the history may not become the basis for future, the experiences from the buyback program of 2004 can give insights into what can be expected this time.
4. The maximum buyback price announced in that 2004 buyback program was at Rs 285 per share (that is, prebonus price of Rs 570 per share). The maximum buyback price they have announced is about 10.87% premium over the share price just before the buyback announcement.
5. Further, the size of the buyback program is kept at Rs 2999 Crores. This was about 10% of the share capital plus free reserves as of 31st March 2004.
6. If one observes, the actual buyback done by the company during that buyback program in 2004 and 2005, some interesting observations emerge.
7. One is, after the announcement of buyback on 28th December 2004, the company has done buyback only on 9 days. And, the total buyback done by the company was to the tune of about Rs 149.62 Crores. So, the actual buyback program is to the tune of just 5% of the total buyback size.
8. The average buyback price paid by the company works out to about Rs. 521.39 per share. As the buyback program was through Open Market mechanism, the actual buyback price can be at a discount to the maximum buyback price.
9. On the basis of this experience of 2004 buyback program, one can expect the following in the 2012 buyback program.
10. The current share capital plus free reserves of compay is about Rs 1,46,000 Crores, as per the latest financials on 31st March 2011. One can assume 10% of this amount as the maximum buyback size. That is, the buyback size this time can be about Rs 14,600 Crores. However, the company may choose the buyback size in the range of Rs 10,000 Crores to Rs 14,600 Crores.
11. Similarly, the current share price of the company is about Rs 770 per share. Assuming about 10% premium, the maximum buyback price may be fixed at about Rs 850 per share. However, the company may choose the maximum buyback price in the range of Rs 850 - Rs 900 per share.
12. Further, whatever may be the buyback size the company may announce, the investors shall remember that there is no mandatory requirement that the company shall buy the entire amount of buyback. The 2004 buyback program suggests that the company had bought back about 5% of the announced buyback program.
13. To conclude, whatever may be the company's announcement, it is reasonable to expect that this will be largest ever buyback program in the history of Indian capital market. Also, this buyback announcement will be a strong statement from the company's management that they "feel" currently the share price in the market is undervalued than the intrinsic worth.
14. Further, with about Rs 85,000 Crores of cash on the books, the company is endowed with strong muscle to complete the buyback program.
15. However, considering huge expansion plans that company is lining up in the oil and gas, telecom, retail, etc, the company may wish to preserve as much cash as possible to finance the expansion plans.
(From Market Sources)
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Thanks and Regards
Rohit Saxena
Losers say it is hard and impossible, but winners say it is hard but not impossible." Rohit Saxena
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