BUYBACK - BUYING TO GET RIL BACK IN GREEN

By Ruma Dubey RIL has been a much ignored or else battered stock on the bourses over the past few days. And it came as no surprise to see that it used the same trick which many others have used to prop up the sagging share price and shore up investor confidence - announce a buy back. On Friday, 20th Jan, along with the Q3FY12 numbers, the company will be announcing the buyback details. And that has set the stock ablaze as it has been up strong in the green since it opened for trade today morning. It had closed yesterday at Rs.740.35 and today it opened higher at Rs.762.15. It is currently closer to its intra day high at Rs.775. The company, as we all know, has been sitting on a huge pile of cash. It has been scouting around for organic buys around the world but nothing really came through. And in the current scenario, what could be a better utilization of some of the Rs.61,490 crore cash than buy back its own shares at the current price and shore up the promoters stake, which currently stands at 44.71%. The news is that the promoters might hike stake to 50% and its aim is to ultimately take it up to 55%. The last time, RIL had announced a buy back, it was in 2005 and then the buyback price was at Rs.570 per share and it had spent close to Rs.3000 crore for the same. At that time, Anil Ambani had opposed the buy back and had created a huge hue and cry, saying a bonus would have been much better. But he was isolated in that hue and cry and RIL managed to buy back much ahead of its schedule. This time around, almost 7 years hence, we do not know what could be the buyback price but word on the street is that price would be around 8-9% higher than tomorrow&rsquo;s closing price. This is based purely on the fact that the same logic was applied when buy back price of 2005 was announced. The company&rsquo;s cash pile is only expected to go up further. The current cash of Rs.61,490 crore does not include money received from BP and when that gets added, the tally goes to a jaw dropping Rs.97,000 crore. And then there is the cash flow generated in the course of the business in Q3. Thus, at the end of FY12, the company is expected to have cash of around Rs.1,00,000 crore, even on a conservative estimation. Well, if cash is king in today&rsquo;s uncertain times, we surely know who the King is! This buyback is a good move as idle cash is also bad business. This way it will at least shore up promoters stake. Currently, apart from refinery, rest all verticals are kind of limping. There is no clarity on the business of 4G business and thus its best to utilize the idle cash, at least some of it to hike stake rather than venture into new businesses just for the sake of using the cash. Our editor, Mr.SP Tulsian states that RIL might allocate anywhere between Rs.12,000 crore to Rs.15,000 crore for this buyback. It is likely to be an enabling resolution with a cap of may be Rs.900 a share. For now, this is one winner stroke from RIL, rather the only sane thing to do when the stock has been battered down. Shoring up promoters stake is a good move. This buyback could provide support to the share price in the short term, but much would depend on the nature and terms of the exercise. RIL will set a base price for the stock and if the price falls below this price, the company has the option to buy its shares from the market, which will be the most likely route. If the buyback is at a big premium, stock price in short term is sure to surge, which you should take advantage of.