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Reliance Industries (RIL)
Energy
A step in the right direction but size of the step important. We would wait for
details (particularly, size and price) of RIL’s proposed buy-back program before forming
an opinion on the same. The key issue to focus on would be the reason behind the buyback
program—(1) price signal or (2) return of money to shareholders—and the size of
the program would provide more clarity on the same. We maintain our BUY rating
noting (1) attractive valuations at 9.2X FY2013E adjusted EPS (excluding treasury shares)
and (2) 19% potential upside to our SOTP-based target price of `925.
Buy-back program may allay investor concerns on cash utilization but size of program important
In our view, the size of the program would determine the impact of the proposed buy-back
program. If the buy-back program is of a token amount, investors would likely ignore it and
construe it as a price-signaling tool; RIL’s past track-record on buy-back programs is not very
encouraging (see Exhibit 1). However, if it is a meaningful portion of its cash, investors would treat
it positively and see it as a way of returning money to shareholders. We think a `100-150 bn buyback
program would be considered meaningful by shareholders. RIL’s Board of Directors would
consider and approve the proposal for the buy-back program on January 20, 2012.
SEBI’s recommendations, if implemented, may make the buy-back program more effective
We note that there might be some skepticism on the seriousness of the buy-back program given
prior instances of (1) RIL not buying any shares in the previous buy-back rounds of FY2001 and
FY2002 despite RIL stock trading below the then buy-back price (maximum price of `303/share)
for extended periods of time and (2) RIL buying shares worth `1.5 bn only in FY2005 against a
proposed buy-back amount of `30 bn. We note that SEBI has recommended to individual
companies to provide a minimum commitment for buy-backs recently.
Maintain BUY given attractive valuations
We maintain our BUY rating noting (1) attractive valuations at 9.2X FY2013E adjusted EPS
(without treasury shares) and (2) 19% potential upside to our SOTP-based target price of `925.
Despite the recent run-up, we still find the reward-risk balance favorable. We ascribe a fairly
conservative multiple to RIL’s refining and petchem segments (5X EV/EBITDA multiple) to factor the
current weakness in refining and petchem cycles. We do not rule out downside risks to our
FY2013E assumptions of (1) RIL’s refining margins of US$9.7/bbl and (2) modest decline in
petchem margins. However, weaker-than-normalized margins would logically demand a higher
multiple; we typically use 6-6.5X multiple for mid-cycle or normalized margins.
Some key details of buy-back process in India
Methodology of buy-back scheme. As per Section 4 of SEBI (Buy back of Securities)
Regulations, 1998, a company may buy back its shares or other specified securities by any
one of the following methods: (a) from the existing shares or other specified securities on
a proportionate basis through the tender offer, (b) from open market through (i) bookbuilding
process and (ii) stock exchange, and (c) from odd-lot holders.
Duration of buy-back program. As per Section 77A of Companies Act, 1956, every
buy-back shall be completed within 12 months from the date of passing the special
resolution or a resolution passed by the Board. As per media articles, SEBI is planning to
reduce the timeline for buy-back to 34-44 days from 63-114 days currently.
Quantum of buy-back amount. A company may buy back its shares without
shareholders’ resolution, to the extent of 10% of its paid-up share capital and free
reserves. However, if a company intends to buy back its shares to the extent of 25% of its
paid-up share capital and free reserves, then the same has to be approved by
Shareholders Resolution as specified in Section 77A of Companies Act, 1956. Also, the
ratio of the debt owed by the company should not be more than twice the capital and its
free reserves after such buy-back.
Relevant section on Board resolution
As per Section 5A of SEBI (Buy back of Securities) Regulations, 1998,
(1) A company, authorized by a resolution passed by the Board of Directors at its meeting to
buy back its securities under first proviso to Clause (b) of Sub-Section (2) of Section 77A of
the Companies Act, 1965 as inserted by the Companies (Amendment) Act, 2001, may buy
back its securities subject to the following conditions:
(a) before making a public announcement under Sub-Regulation (1) of Regulation 8, a public
notice shall be given in at least one English national daily, one Hindi national daily and a
regional language daily, all with wide circulation at the place where the registered office of
the company is situated;
(b) the public notice shall be given within two days of the passing of the resolution by the
Board of Directors;
(c) the public notice shall contain the disclosures as specified in Schedule I.
(2) A copy of the resolution, passed by the Board of Directors at its meeting authorizing buy
back of its securities, shall be filed with the Board and the stock exchanges, where the
securities of the company are listed, within two days of the date of the passing of the
resolution
The disclosures specified in Schedule I include,
(i) the date of the Board meeting at which the proposal for buy-back was approved by the
Board of Directors of the company;
(ii) the necessity for the buy-back;
(iii) the company may specify in the explanatory statement to the notice that the
shareholders at the general meeting may authorize the Board of Directors of the company to
adopt one of the methods referred in Sub-Regulation (1) of Regulation 4 at the appropriate
time;
(iv) the maximum amount required under the buy-back and the sources of funds from which
the buy-back would be financed;
(v) the basis of arriving at the buy-back price; and
(vi) the number of securities that the company proposes to buy back
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
A step in the right direction but size of the step important. We would wait for
details (particularly, size and price) of RIL’s proposed buy-back program before forming
an opinion on the same. The key issue to focus on would be the reason behind the buyback
program—(1) price signal or (2) return of money to shareholders—and the size of
the program would provide more clarity on the same. We maintain our BUY rating
noting (1) attractive valuations at 9.2X FY2013E adjusted EPS (excluding treasury shares)
and (2) 19% potential upside to our SOTP-based target price of `925.
Buy-back program may allay investor concerns on cash utilization but size of program important
In our view, the size of the program would determine the impact of the proposed buy-back
program. If the buy-back program is of a token amount, investors would likely ignore it and
construe it as a price-signaling tool; RIL’s past track-record on buy-back programs is not very
encouraging (see Exhibit 1). However, if it is a meaningful portion of its cash, investors would treat
it positively and see it as a way of returning money to shareholders. We think a `100-150 bn buyback
program would be considered meaningful by shareholders. RIL’s Board of Directors would
consider and approve the proposal for the buy-back program on January 20, 2012.
SEBI’s recommendations, if implemented, may make the buy-back program more effective
We note that there might be some skepticism on the seriousness of the buy-back program given
prior instances of (1) RIL not buying any shares in the previous buy-back rounds of FY2001 and
FY2002 despite RIL stock trading below the then buy-back price (maximum price of `303/share)
for extended periods of time and (2) RIL buying shares worth `1.5 bn only in FY2005 against a
proposed buy-back amount of `30 bn. We note that SEBI has recommended to individual
companies to provide a minimum commitment for buy-backs recently.
Maintain BUY given attractive valuations
We maintain our BUY rating noting (1) attractive valuations at 9.2X FY2013E adjusted EPS
(without treasury shares) and (2) 19% potential upside to our SOTP-based target price of `925.
Despite the recent run-up, we still find the reward-risk balance favorable. We ascribe a fairly
conservative multiple to RIL’s refining and petchem segments (5X EV/EBITDA multiple) to factor the
current weakness in refining and petchem cycles. We do not rule out downside risks to our
FY2013E assumptions of (1) RIL’s refining margins of US$9.7/bbl and (2) modest decline in
petchem margins. However, weaker-than-normalized margins would logically demand a higher
multiple; we typically use 6-6.5X multiple for mid-cycle or normalized margins.
Some key details of buy-back process in India
Methodology of buy-back scheme. As per Section 4 of SEBI (Buy back of Securities)
Regulations, 1998, a company may buy back its shares or other specified securities by any
one of the following methods: (a) from the existing shares or other specified securities on
a proportionate basis through the tender offer, (b) from open market through (i) bookbuilding
process and (ii) stock exchange, and (c) from odd-lot holders.
Duration of buy-back program. As per Section 77A of Companies Act, 1956, every
buy-back shall be completed within 12 months from the date of passing the special
resolution or a resolution passed by the Board. As per media articles, SEBI is planning to
reduce the timeline for buy-back to 34-44 days from 63-114 days currently.
Quantum of buy-back amount. A company may buy back its shares without
shareholders’ resolution, to the extent of 10% of its paid-up share capital and free
reserves. However, if a company intends to buy back its shares to the extent of 25% of its
paid-up share capital and free reserves, then the same has to be approved by
Shareholders Resolution as specified in Section 77A of Companies Act, 1956. Also, the
ratio of the debt owed by the company should not be more than twice the capital and its
free reserves after such buy-back.
Relevant section on Board resolution
As per Section 5A of SEBI (Buy back of Securities) Regulations, 1998,
(1) A company, authorized by a resolution passed by the Board of Directors at its meeting to
buy back its securities under first proviso to Clause (b) of Sub-Section (2) of Section 77A of
the Companies Act, 1965 as inserted by the Companies (Amendment) Act, 2001, may buy
back its securities subject to the following conditions:
(a) before making a public announcement under Sub-Regulation (1) of Regulation 8, a public
notice shall be given in at least one English national daily, one Hindi national daily and a
regional language daily, all with wide circulation at the place where the registered office of
the company is situated;
(b) the public notice shall be given within two days of the passing of the resolution by the
Board of Directors;
(c) the public notice shall contain the disclosures as specified in Schedule I.
(2) A copy of the resolution, passed by the Board of Directors at its meeting authorizing buy
back of its securities, shall be filed with the Board and the stock exchanges, where the
securities of the company are listed, within two days of the date of the passing of the
resolution
The disclosures specified in Schedule I include,
(i) the date of the Board meeting at which the proposal for buy-back was approved by the
Board of Directors of the company;
(ii) the necessity for the buy-back;
(iii) the company may specify in the explanatory statement to the notice that the
shareholders at the general meeting may authorize the Board of Directors of the company to
adopt one of the methods referred in Sub-Regulation (1) of Regulation 4 at the appropriate
time;
(iv) the maximum amount required under the buy-back and the sources of funds from which
the buy-back would be financed;
(v) the basis of arriving at the buy-back price; and
(vi) the number of securities that the company proposes to buy back
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