Reliance Energy Ltd shares need to correct sharply. Much of its value comes from its 45% holding in Reliance Power Ltd, which has lost about 22% in market capitalization since its bonus shares issue was proposed.
Reliance Energy, in turn, has hardly corrected in the same period.
Reliance Energy shares have now been given a prop in the form of a buy-back issue. The amount that will be utilized for the buy-back is not known yet, but it’s likely to be enough to support the stock at current levels.
Cash is hardly a problem for the company. Having raised large amounts for mega power projects such as the one in Dadri, the company seems to have ended up with more cash than it needs.
The large projects have been transferred to the books of Reliance Power, but the cash has remained with the company.
It had inter-corporate deposits worth Rs7,740 crore, Rs2,172 crore in banks and liquid investments worth Rs2,090 crore, totalling cash and cash equivalents worth Rs12,000 crore. Even after adjusting for its debt of Rs5,858 crore, it still has more than Rs6,000 crore in cash.
Such is the extent of cash held by the company that in the first nine months of this fiscal year, other income, mostly interest and financial income, exceeded its entire profit before tax.
A buy-back issue is normally done by companies which have more cash than they can use, and think the best alternative is to return cash to shareholders.
But Reliance Energy’s is a special case. Just last month, it raised another Rs7,835 crore by issuing convertible warrants to the promoter group.
What explains this dichotomy? Well, the Anil Ambani group has already claimed that vested interests are hammering all group shares. According to one theory doing the rounds in the market, the buy-back could be a way to ebb the tide.
Texmaco: demand for wagons doubles
There was a brief flurry of excitement in the shares of Texmaco Ltd on Tuesday, after the announcement in the Railway Budget of an all-time high requirement of 20,000 wagons for 2008-09. The stock gave up almost all its gains by the end of the day, however, closing at Rs1,608, up just 1%. That wasn’t surprising, considering that what the minister for railways had to say about wagons was already known and therefore priced in. But the Texmaco scrip is one of those that have outperformed the Nifty this year, down 10% compared with 14.4% for the Nifty.
That’s partly on account of the expectations of strong order growth from the railways in its wagon business. In 2007-08, the railways had procured 10,200 wagons, of which Texmaco’s share was 2,539. The company, which had a net turnover of Rs480 crore for the nine months to 31 December 2007, has an order backlog of Rs2,000 crore.
Sameer Ranade, senior analyst with PINC Research, says that about half the order backlog would consist of orders for wagons placed by the Indian Railways and by the private sector.
Apart from the wagons business, which analysts point out comprise about half its turnover, Texmaco also has a process engineering and hydromechanical equipment business. Its results for the third quarter have been excellent, with net sales rising 79% and operating profits up 80%.
The company has tied up with United Group Ltd (Australia), which has expertise in building wagons, passenger coaches and locomotives. Reports say that they plan to invest Rs200 crore to set up a new plant to manufacture stainless steel coaches, which the railways intends to introduce. Texmaco also has plans to manufacture metro coaches.
Texmaco’s stock, currently priced at 22.5 times its consensus estimated fiscal 2009 earnings, is not cheap. But Ranade points out that not only have the railways doubled its requirement of wagons, but its capital expenditure plans indicate that the company’s growth is likely to be sustained.
Seen from that perspective, Texmaco’s growth too could be sustained, more than justifying its relatively high valuation.
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