Overloaded with cash, Mukesh announces RIL share buyback

Reliance Industries on Wednesday announced a buyback of shares to lift the company’s share prices. The Mukesh Ambani energy giant has informed the Bombay Stock Exchange that a meeting of the board of directors will be held on 20 January “to consider and approve a proposal for buyback of the company’s equity shares in accordance with all applicable provisions of law.”

Reliance shares rose immediately on the announcement, and were up 4 percent around 10 am at Rs 772.

[caption id=“attachment_185987” align=“alignleft” width=“380” caption=“Reliance shares rose immediately on the announcement, and were up 4 percent around 10 am at Rs 772. Vivek Prakash/Reuters”] [/caption]

While it is not clear at what price Reliance will buy back its own shares, the chances are that the limit will be set a bit higher than current market prices. In any case, share prices tend to rise whenever companies announce buybacks. So managements often achieve their purpose without actually buying back much.

Reliance is overloaded with cash, and is waiting for the right cues from government to start investing. When the stock breached Rs 700 over the year-end, Firstpost had reported that “for a company sitting on Rs 300 in hard cash per share, a share price of Rs 700 means investors are getting a share of its business for Rs 400.”

Reliance was sitting on a cash pile of Rs 61,490 crore as on 30 September 2011. Add to this the $7.2 billion the company received from BP, and the cash rises to Rs 97,000 crore. Kotak expects the company to generate Rs 88,000 crore in gross cash flows over the next two years. Compared to this the stock currently trades at a market capitalisation of Rs 2,26,428 crore.

In other words the company is sitting on nearly Rs 300 per share of cash. With investment opportunities in organic growth not materialising, a buy back of shares was perhaps the only option to get a fair share value.