Ten things about Reliance buyback plan

The buyback of shares announced by Reliance Industries has created excitement and interest amongst market participants.  However, the disappointing earnings data is likely to curb any significant rally in the company's share price. The company's net profit in December 2011 is the lowest in two years. 

Buyback offers are considered positive because they reduce the number of outstanding equity shares. This improves the earning per share if the net profit is divided by the reduced number of shares. It also shows that the management has belief in the company's performance going forward and it is setting a floor price. 

Here are ten facts about RIL's buy back programme:

1. Reliance Industries had last announced a buyback in December 2004 (about seven years ago).

2. The 2004 buyback program offered a premium of 10.87% over the share price just before the buyback announcement.

3. The size of the buyback program was kept at Rs 2,999 crore, which was about 10 per cent of the share capital plus free reserves as of 31st March 2004.

4. After the announcement of buyback on 28th December 2004, the company bought shares on nine days only. The total buyback done by the company was to the tune of about Rs 149.62 crore. So, the actual buyback program was to the tune of just 5% of the total buyback size.

5. The average buyback price paid by the company worked out to about Rs 521.39 per share. As the buyback program was through open market mechanism, the actual buyback price can be at a discount to the maximum buyback price (Rs 570).

6. The current share capital plus free reserves of company is about Rs 1,46,000 crore, as per the latest financials on 31st March 2011. The buyback size this time is Rs 10,440 crore.

7. The current share price of the company is about Rs 793 per share. At 10% premium, the maximum buyback price is  fixed at Rs 870 per share.

8. Investors should remember that there is no mandatory requirement that the company shall buy the entire amount of buyback. In 2004, the company bought back only 5 per cent of the announced buyback program.

9. So, it is reasonable to expect that this will be largest ever buyback program in the history of Indian capital market. Also, this buyback announcement will be a strong statement from the company's management that they "feel" currently the share price in the market is undervalued than the intrinsic worth.

10. Further, with about Rs 85,000 crore of cash on the books, the company is endowed with strong muscle to complete the buyback program.