Companies

Reliance Infra's 4th buyback: Should a company use its reserves to prop up share price?

R.Yegya Narayanan Coimbatore | Updated on March 12, 2018

anil   -  PTI

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Announcement comes on the heels of preferential allotment to a promoter group

Reliance Infrastructure Ltd today announced the buyback price of its shares (up to Rs 725/share) through the stock exchanges that was nearly 15 per cent higher than the current market price involving a whopping outgo of up to Rs 1,000 crore but the generous announcement failed to set the stock on fire in the exchanges.

Probably, the price announcement came wrapped around its third quarter results that was a little muted and hence failed to inspire purchase in the counter though the Sensex itself zoomed by over 470 points. This is the fourth such move by the company and the latest buy back value beats the cumulative value of the three previous share buy backs totalling Rs 923 crore.

The company apparently felt that its stock was undervalued since it has suffered about 45 per cent from its year's high price. But so are most of the stocks in the infrastructure space. In fact, out of the 25 stocks that make NSE's CNX Infra index, 20 shares have declined over a 365-day period, though in today's trading, 20 had moved up with 5 declining.

Generally companies announce buy back of shares that are subsequently extinguished to help reduce the equity capital as the number of outstanding shares become less. This leads to an increase in EPS even if the performance of the company does not improve. Consequent to the increase in EPS, it is presumed that the stock prices would improve as the PE ratio becomes attractive.

For the company, this may be a better proposition as no tax outgo is involved compared to dividend payout. But there is no guarantee that post-share buyback, the share prices would move up if the overall market remains volatile or is in a bear-grip.

The Reliance Infra share value has fallen nearly 45 per cent from the year's high of Rs 1,200-levels to Rs 630-levels now. But this fall should be viewed in the wider context of the hammering the infrastructure stocks have been subjected to in the capital markets in recent months caused by many factors including economic slowdown, lesser spending on infrastructure projects by the governments, increase in key raw material prices like cement and steel and the rising interest rates.

It is a moot point whether in any time in the near future, there could be a favourable change on any of these issues without which the performance of the infrastructure companies may remain muted.

The buy back price announcement comes close on the heels of allotment of 2.26 crore equity shares to AAA Project Ventures Private Ltd, a Reliance Anil Dhirubhai Ambani promoter group company against convertible warrants issued to them for Rs 2,095 crore. The issue price of Rs 929 a share is in stiff premium to the prevailing market price, which the company said, reflected `strong vote of confidence by the promoter group on the company's future growth prospects'.

For the quarter ending December 2010, the total operating income stood at Rs 2,617 crore (Rs 2,287 crore). But the net profit for the period fell sharply to Rs 165.72 crore (Rs 277.13 crore) and the basic EPS for the latest quarter was Rs 6.77 (Rs 12.30) and the equity base was Rs 267.42 crore (as on February 14). The company's reserves are huge – Rs 13, 830 crore – offering enough cushion even against a colossal buy back outgo.

But the decision to buy back shares raises certain fundamental questions.

Is not the valuation of a share in the capital markets a part of the market's functioning and should a company use its reserves for propping up the share price? Why should it not be used to reward shareholders with dividend or bonus payment or for meeting its investment needs? Is there any assurance, in the present market conditions when infrastructure stocks are in reverse-gear, that the buy back would boost share prices?

Already, the company had spent Rs 923 crore in three buy backs in the past.

The company hopes that the buy back would reduce short-term volatility in share price and ‘deter speculative activity in the company's share price.'

On Monday's closing price of Rs 627 , the share was trading at a 31 per cent discount to its consolidated book value which was Rs 903 a share.

Published on February 14, 2011

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