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Reliance: The hour of reckoning
BS Bureau in Mumbai |
December 28, 2004 10:57 IST
Given the circumstances, the Reliance Industries management had hardly any option but to announce a buy-back of shares at a substantial premium.
That is the only way they can send a strong signal to the market that, in spite of the open war between the Ambani brothers, the business continues to do well and that the stock's current market price is too low.
Significantly, the stock hasn't reached Rs 570 since early April, going up since then to a high of Rs 567 on October 20.
The last time RIL announced a buyback, they didn't buy a single share. This time, however, is likely to be different, with the markets ensuring that they have to really spend hard cash to buy the shares back.
Because of the uncertainty about the family squabble, there is no dearth of investors willing to offload their shares, with many looking at the buyback as an exit option. That's probably why the stock fell despite the announcement.
Analysts point out buying back shares will also send the right signal to the market, and the easiest route would be for RIL to buy back its treasury stock with the Trust.
If they do buy back shares, that will increase earnings per share and buoy the share price. RIL's cash flow, should be enough to take care of the outflow on account of the buy-back, especially since it's unlikely that they will have to buy the aggregate amount of Rs 2999 crore (Rs billion).
The uncertainty surrounding the stock is likely to continue -- although Anil Ambani is completely isolated in the RIL board, he is far from being a spent force. On the positive side, RIL's third quarter results should be excellent, all the more so because the management will try to show that the family row is not affecting the business.