Reliance Energy's ill-advised share buyback

Reliance Energy's stock price slumped 13 per cent the day after the company finalised its share buy-back. It is time promoters stopped using such props to support stock prices; they don't always work and can be harmful. By Vivek Sharma

Reliance EnergyOne of the reasons given in the Reliance Energy press release announcing the share buy-back was that "it will send a strong signal to the capital markets on the perceived under-valuation of the company's share price".

Unfortunately, the market had other ideas about the company's valuation and sent the stock crashing by as much as 13 per cent the next trading day. At Friday's closing price of Rs1,269, the stock is now at a discount of as much as 21 per cent to the indicated maximum buyback price of Rs1,600 per share. What gives?

Last year's big surge
Reliance Energy was by far the best-performing large cap stock in 2007. From a level of around Rs500 in early 2007, the stock jumped more than 400 per cent to its peak of close to Rs2,600 in the first week of January 2008. The Anil Ambani-group wasted no opportunity to brag about this 'phenomenal and unprecedented' surge in shareholder wealth. But, it was not as if this massive rally in share price was backed by any substantial change in the financial performance of the company.

For the financial year 2006-07, ended 31 March 2007, Reliance Energy reported a 43 per cent increase in consolidated total revenues to Rs6,575 crore and a 23 per cent rise in net profit to Rs801 crore as compared to the previous year. The numbers appear good enough until the other income component of Rs882 crore for 06-07 and Rs610 crore for the previous period are factored in. The bulk of this other income is from interest receipts on surplus funds and foreign exchange gains.

After excluding other income, Reliance Energy earned a profit before tax of Rs196 crore for the full year 2006-07 from its core businesses of electricity generation, distribution and EPC. This was 34 per cent lower than the Rs297 crore in profits before taxes from the core businesses for 2005-06.

The story is no different for the current financial year as well. For the first nine months of 2007-08, Reliance Energy has reported an 18 per cent increase in total revenues to Rs5,525 crore and a 37 per cent rise in net profits to Rs773 crore as compared to the same period of previous year. Once again, the improvement in bottom line is only because of the rise in other income to Rs853 crore from Rs607 crore. Profit before taxes from the core businesses for the first nine months of current financial year at Rs174 crore is 15 per cent lower than the same period of previous year.