Reliance Energy plans buyback at Rs 1,600/share

Anil Ambani’s Reliance Energy (REL) said on Wednesday that it would buy back shares worth up to Rs 2,000 crore at a price of up to Rs 1,600 a share, a 9.6% premium over Wednesday’s closing price.

With the fund allocated for buyback, the company could purchase around 1.25 crore shares from the open market, which would raise promoter’s stake by 1.5% to 37% on a reduced equity base, said a senior company executive.

The REL board, which met on Wednesday, has decided to complete the buyback in two phases. The company will release Rs 800 crore in the first tranche, while the remaining Rs 1,200 crore will be allotted in the second phase, subject to shareholders’ approval. The buyback is to “reduce short-term volatility in the company’s share price and deter speculative activity” in the stock, the company said in a statement.

The promoters’ equity in the power distribution company stands at 35.5% after they scaled up their holding by 2.5% in past one year through creeping acquisitions. The REL stock quadrupled in 2007, making it one of the top performers in the stock market. The share has fallen over 30% so far this year, more than the BSE index’s 18.5% drop. Ahead of the buyback announcement, the REL share closed 3% lower at Rs 1,459.45 on the BSE on Wednesday.

“REL, which has a cash reserve of almost Rs 11,000 crore and a net worth of Rs 10,000 crore, is undervalued in the market. The buyback will reduce the equity base, resulting in an increase in the earnings per share (EPS) since the shares bought back will be extinguished. This, in turn, will increase the promoters’ stake on a reduced equity base. Also, it is expected to set a floor price and restrict the downside,” said an analyst with a local brokerage. REL’s fully diluted equity capital is Rs 279.53 crore, while its market capitalisation is over Rs 42,000 crore.

The move, which aims to bolster investor confidence, came soon after REL arm Reliance Power announced three bonus shares for every five shares held by its investors. Reliance Power slumped 17% on its debut in February after raising Rs 12,000 crore through the country’s largest IPO.

Post-announcement of the bonus issue, the Reliance Power stock crossed the issue price of Rs 450. But it came down by 4.1% on Wednesday to close at Rs 376.25. The bonus shares will bring down the cost of acquiring Reliance Power shares to Rs 269 for retail investors and Rs 281 to others. The Reliance Power shares were sold at Rs 450 through the IPO, which offered Rs 20 discount to retail investors.

This is the second time REL is going for a buyback after the Reliance group had acquired the erstwhile BSES. Earlier, in June 2004, before the demerger of the Reliance group, it had bought back shares worth Rs 350 crore. It had paid a maximum price of Rs 525 per share, which represented a 12% premium to the low of Rs 463 on May 31, 2004, the day on which the notice to consider buyback of shares was issued to the stock exchanges.