Mumbai: The board of Reliance Energy Ltd has approved a buyback of shares worth up to Rs2,000 crore from the open market at a peak price of Rs1,600 a share, in an effort to increase the firm’s valuation. The buyback will be carried out in two phases.
Regaining ground: The buy-back is seen as yet another move by Anil Ambani to restore investor confidence in his group companies.
Reliance Energy will use the cash and cash equivalents on its books to finance the repurchase, and expects this to “reduce short-term volatility and deter speculative activity.”
The company, part of Reliance-Anil Dhirubhai Ambani Group (R-Adag), will buy back shares worth about Rs800 crore in the first phase, which is effective immediately.
In the second phase, it will buy back shares worth up to Rs1,200 crore, subject to shareholder approval.
The firm said the buyback would “send a strong signal to the capital markets on the perceived under-valuation of the company’s shares price; and reiterate the confidence of management in future growth prospects of the company.”
Reliance Energy was the biggest gainer among Sensex stocks in 2007, but has fallen more than 30% in 2008, compared with a drop of 18.5% in the Sensex, the benchmark index of the Bombay Stock Exchange (BSE). Its shares had risen 307.87% in 2007, outperforming the Sensex, which rose about 45%.
The maximum repurchase price of Rs1,600 is 9.6% more than the stock’s closing price of Rs1,459.45 on Wednesday.
“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.
As of 31 December, promoters and their associates owned 34.68% in Reliance Energy, according to data available on the BSE website.
The buyback, announced last week, is seen as yet another move by Anil Ambani to restore investor confidence in the R-Adag group, which has applied to the market regulator, Securities and Exchange Board of India, for approval for an initial share sale in another unit. The repurchase comes in the wake of a decision to issue bonus shares to non-promoter shareholders of Reliance Power Ltd, which recently debuted on the bourses and mostly traded at a price lower than its issue price.
R-Adag has filed a draft red herring prospectus to sell shares in Reliance Infratel Ltd, a unit of Reliance Communications Ltd. The company plans to sell 89.1 million shares, or 10.1%, of Reliance Infratel.
Analysts say that the buyback may offer some support to the stock of Reliance Energy, but they shied away from making stock-specific statements, given the current volatility in the markets.
Adjusted for the bonus ratio of 3:5, Reliance Power valuation is down about 35% compared with the levels they were trading at before the bonus was announced.
The share sale of Reliance Power, India’s biggest domestic initial public offering so far, was sold out in less than a minute, but on 11 February, when the shares were listed on the exchanges, they plunged and closed 17.22% below the issue price of Rs450. The shares have closed above the issue price only once, on 25 February, the day after the firm said it would give three free shares to investors for every five they held.