Mumbai: Reliance Energy’s plans for a share buy-back seem aimed at restoring some lustre to the Anil Dhirubhai Ambani Group after the dismal stock market debut of its Reliance Power business last month, analysts said.
The group is awaiting approval to list another company on the stock market, and shoring up sentiment in a souring market appears to be a key purpose of the buy-back, which will be considered by Reliance Energy’s board on Wednesday.
“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.
“They don’t have cash from operations for the buyback.”
The company did not say why it was buying its own shares.
Reliance Communications has filed initial papers with the stock market regulator to sell 10% of Reliance Infratel and is expected to raise $1 billion-$1.5 billion, and it is also looking to list its mewly formed Reliance Globalcom unit, which owns its international operations.
Reliance Power tanked on debut in February in a huge disappointment to investors after a frenzy to be part of India’s biggest initial public offering. The $3 billion issue fully subscribed in less than one minute.
To appease investors, Anil Ambani announced a special bonus issue for Reliance Power shareholders, excluding the company’s founders, which includes Reliance Energy.
The buy-back appears to be a similar move. Reliance Energy shares quadrupled last year, but have fallen more than 40% from a record of Rs2,361.70 in January.
“There is a dichotomy in this buy-back announcement. On one side the owners are pumping money in the company for expansion and on the other it is returning cash to investors saying that it does not have any better use of it,” said Mehul Mukati, analyst with Emkay Share and Stock Brokers Ltd.
In January, Reliance Energy approved the issue of 43 million warrants, convertible into shares by July next year, to a company that is owned by Anil Ambani.
The warrants can be converted to shares by July 2009 at Rs1,822.08 each, which analysts say may be a benchmark for the buy-back price. Reliance Energy shares closed at 1,485.55 rupees on Monday, their lowest close since 22October.
“Probably Ambani feels that Reliance Energy’s stock price was undervalued and may offer to buy shares at a price same as his own purchase through warrants,” said Nikunj Doshi, investment manager at Envision Capital.
Shares of Reliance Energy, which has transfered its future power projects to Reliance Power, are already commanding a premium, trading at 38 times their forecast earnings, against 21 times for NTPC Ltd, which generates a quarter of India’s power.
Rival Tata Power trades at a multiple of 42, and shares in Reliance Industries, India’s largest listed company which is run by Anil’s estranged elder brother, trade more than 24 times forward earnings, Reuters data shows.