Investors bet on RIL extending buyback

Investors of India's largest company, Reliance Industries Ltd (RIL), are betting on the company to extend its buyback programme by one more year, to give support to the share price. A decision by Reliance Industries is expected next week when the Rs 10,000-crore buyback plan closes and its board meets to discuss third quarter results.

Reliance has spent Rs 3,360 crore (Rs 33.6 billion) of the Rs 10,000 crore (Ra 100 billion) budget till date in buying back its shares from shareholders in the past year. The buyback was launched in January last year, after its stock fell below the Rs 700-level in the last quarter of calender 2011.

With the company fighting a battle with then petroleum minister Jaipal Reddy and an aggressive Comptroller and Auditor General, seeking answers for investments made in the KG-D6 gas fields, its share price fell below Rs 700 in the middle of 2012.

Since then, Reliance supported its share price through the calendar year, closing with a 17 per cent gain as compared to a 26 per cent rise in the BSE Sensex (see chart). Most of the time, RIL made aggressive interventions when the price fell below Rs 800.

"With earnings expected to remain soft over the next 18 months, in our view, and valuations at a 5-55 per cent premium to global peers on FY13-15E earnings, capital reduction measures may be key to support stock price performance in 2013, too," says an analyst with Barclays Capital.

This comes at a time when India's market regulator, Sebi, has proposed sweeping changes to buyback norms, making these a less favoured option for stabilising stock performance. As the new  norms might take time to be ratified, analysts say Reliance has an option to renew the buyback for another year.

An email sent to the Reliance spokesperson did not elicit a response but an insider said the company will decide on extending the buyback plan by next week. On Friday, the stock closed down 1.2 per cent at Rs 839 a share, as compared to yesterday's closing. Thanks to the buyback plan, the Mukesh Ambani family stake had gone up marginally to 45.34 per cent in the December quarter, from 44.71 per cent in December 2011.

Analysts say they are not expecting any good news from the company in the near term, especially in the backdrop of a delay in the launch of its telecom venture. They are also expecting earnings to remain weak in 2013, as revenue flow from its KG-D6 gas block off the Andhra coast remains negligible.

Analysts say a higher gas price, as recommended by the Rangarajan committee, might add to revenue from April 2014 onwards, after government clearance. The gross refining margins have also remained under pressure in the recent quarter and profits might show a marginal decline. Hence, there will be pressure on the stock from investors and the buyback could be extended, say analysts.