Reliance

Reliance Industries has said it will consider a share buyback in its Friday board meeting, and the stock went up 5% to 780. The theory is that Reliance will use its huge cash reserves – over 85,000 crore – to buy back about 10,000 to 12,000 cr. worth of stock. They will do this using a “market buyback”, where an investment banker will buy Reliance shares using Reliance’s money.

(For more information on what market buybacks are, read my article: Buying Back Our Deficit)

Moneylife finds that they have done a buyback announcement earlier, that didn’t quite meet their stated goals:

RIL has announced a buyback. It had announced a buyback on 28 December 2004. On that occasion the maximum buyback price announced was at Rs285 per share (that is, pre-bonus price of Rs570 per share). The maximum buyback price RIL announced was about 10.87% premium over the share price just before the buyback announcement.

The buyback program, seven years ago, was kept at Rs2,999 crore, which was about 10% of the share capital and free reserves of Reliance as on 31 March 2004.

However, throughout the period, Reliance bought back its shares only on nine days. And, the total buyback done by the company was a measly Rs149.62 crore. So, the actual buyback program was just 5% of the total buyback size of Rs2,999 crore.

(Emphasis mine)

This is not just Reliance, but in most market buyback announcements I have tracked in the last five years, companies have bought substantially lower quantities than they supposedly intended to. The idea of a share buyback was usually to keep the stock price up, but a few days after the announcement the shares would go back down. (Also see: Rajat Rajgarhia of Motilal Oswal thinks the aim is to “shore up sentiment in the stock”)

Another reason I’ve seen quoted for this announcement is that Reliance lost its position as the top weighted stock on the Index, and that Mukesh bhai is big on ranks. Not that this is substantiated, but it’s such an awesome gossip conspiracy story that I had to mention it!

It’s not usual, though, that a company of Reliance’s size – one of the largest in India – makes such “preliminary” announcements, but the company has been very careful to ensure that the stock doesn’t crater around bad results seasons. They have announced gas finds, deals, and agreements, nicely timed around results announcements, which is all above board (and it’s not just them, the big IT company we all know about has done it as well).

The stock, in the last couple years, has not done very well:

And in relative terms, the high for this stock is 1,650 in 2008; and it recently saw levels of 685.

Will this announcement take Reliance to the next level? Chances are: no. They have to show great results. Their Q2 numbers were not great, and their gas and crude finds are in decline; for serious growth they have to rapidly increase investment. While a buyback at this level for the company is good (lesser capital to service), there will be large capital requirements coming in as they explore and find gas, invest in shale assets, expand the broadband/BWA offering, enhance their retail setup or indeed, make their massive refining operation more efficient. These are real game changers, not the buyback.

If the quick rise from the bottom – nearly 20% now – is exciting, then the game is in short term trading, not in a “buy and hope for the Ambani magic”.

A fallout of the Libyan Crisis is that Saudi Arabia is taking up the slack. Except, it can't easily replace Libyan Crude.

“Libya is a producer of light, sweet crude,” says Andy Lipow, president of Lipow Oil Associates, a Houston consultant. “The spare capacity among Opec members is heavy, high-sulphur crude.”

Heavy, sour = higher density, higher sulphur content than "light, sweet". I doubt people are weighing or tasting the darn thing.

The spiel is that refinining heavy-sour is much more difficult, and there are a lot of refineries doing only light-sweet (in industry parlance, aren't "complex" enough). The article goes on to say that these refineries are in trouble, they have to find other light, sweet sources, blah blah.

But.

There are enough complex refineries processing heavy-sour, like Stuart Staniford says:

But it's an entirely different matter to claim that the entire global refining industry cannot make more use of Saudi crude right now, which is what these news stories are implying.  After all, if there's any refinery anywhere that could take more Saudi crude and refine it into gasoline, diesel, or some other useful product, then that refinery could substitute for the lost output from refiners of Libyan crude that cannot switch.  So there's no requirement for individual refineries to switch as long as someone, somewhere, anyone, anywhere can refine more Saudi crude at present.  If that were to be true, then global production of refined products need not fall, as long as at least 1.3mbd of additional Saudi oil can be refined to replace the 1.3mbd of Libyan crude exports that are soon not going to be showing up at oil terminals in Europe.

Among the biggest of the heavy-sour capable refiners is the Reliance Industries RPL plant in Jamnagar. If heavy-sour refining is going to be in demand, and the light-heavy crude price differences sustain, we should see RIL making a good run in the months ahead.

Also, the BP deal is a huge positive. $7.2 billion is usually good enough for a lot - and they already have another $7 billion (31,000 cr.) in the bank. This is a war chest, and they'll buy something with it, surely.

Disclosure: Long.

BP will pay $7.2 billion to Reliance Industries to take 30% stake in 23 oil and gas blocks, and another $1.8 bn based on performance. This is the second BP deal worldwide, after a $8 bn equity swap with Rosneft in Russia. BP will also set up a 50:50 joint venture for marketing LNG.

This is a good deal for RIL. It was getting flak for not being able to pump in more gas or explore more, and it really hasn't built deepwater capabilities yet. BP can also augment the near-term lack of gas by external supplies and feed into the distribution setup RIL has built which is currently not used much. It's huge for the gas industry in India if the distribution setup takes off - NG is an amazing fuel and if you fix transportation it can change our energy profile.

RIL went up 2% yesterday to 957. But nothing spectacular in terms of volumes, honestly. 555 crores on an expiry week is par for the course. Let's see how the markets react today.

In 2007, RELIANCE (RIL) sold shares it owned in Reliance Petroleum Limited (RPL) for 223 rupees.

The share eventually fell back to 70 in late 2008, and recovered to 130 levels when it was merged with RIL - 1 share of RIL for 16 of RPL, which translates to an RPL price of Rs. 112 (RIL is at 900, and had a 1:1 bonus after the merger). Sadly, at the time the merger price was effectively Rs. 60 per share of RPL or so, which is exactly equal to their IPO price in 2006.

But SEBI has now raised doubts about that November sale by RIL. Because of a futures deal:

RIL had sold 4.1 per cent equity in RPL in the open market in November 2007. However, to ensure the transaction did not hurt market sentiment, RIL first sold RPL in the futures and then the spot market while covering the shares sold in futures.

During the process, RIL generated revenues (sale consideration) of Rs 4,023 crore and its profit from the transaction in the futures segment was estimated at around Rs 500 crore.

Sebi had said that since the company was aware of the sale of equity and sold futures prior to that, it amounted to insider trading. However, the company has maintained that all rules and regulations have been complied with. RIL had also said that its action was driven by “protection” of market sentiment and that the gain was recorded in the company’s balance sheet.

...

Sebi’s stand was that if the sale in futures was to protect market sentiment and not to earn profit, the unintended gain should be deposited with Sebi as a settlement amount. RIL, however, is said to have offered a much lower amount. There have been offers and counter offers, but consent could not be reached.

Let's analyse this "insider trade".

What If RIL had lost money because of the large impact cost of its selling RPL shares? In the horrendously unethical world of Indian broking, any attempt to sell shares by RIL would have resulted in brokers front-running and shorting the stock or the future. (SEBI has taken little or no action in such cases, even when it is blatant, and even FIIs know it happens)

A large one time order would have absolutely destroyed the stock - 4,000 crore in one trade? Not happening.

If they split the trade into multiple days, then it would get reported as a bulk/block deal and the world would know and beat up the RPL share.

The futures trade was really the only way to protect the price. This is not rocket science. If I held a ton of shares of a company I want to exit, I'll use the "sell-future-first" policy. FIIs do this all the time. Domestic mutual funds make a few people rich while doing this. (Let's just say fund manager X wants to sell some stock. If someone, let's call him Mr. Broker, knows about the trade, a good amount of money can be made by shorting the future first. Enough said.)

But there are nuances. First, SEBI says there is "unintended gain". Perhaps they figured that out by seeing the actual impact cost of selling the shares versus the gain in the futures. RIL could have covered the futures at a much lower cost than they did - for instance, if they held on to the future short when the share sale was done announced, the market took the price down much further, and they benefited. So even if they allowed the futures transaction, SEBI could say there were extra profits from the announcement, so give that back.

Why is this illegal? Because RIL is an "insider" when it comes to RPL. In other stocks - where FIIs aren't "insiders" - stocks are sold and futures are shorted exactly like this, and profits are made, and perhaps even legally.

Technically SEBI has a case because insider information is any information that can materially impact the stock price. For instance if RIL had sold the stock when it knew, say, that a part of the refinery was going to fail, that would amount to insider trading - I think most people understand that. But if I'm an insider, and I'm selling some stock, does the knowledge that I'm selling the stock constitute insider information? The lines are murky.

This case is interesting from many perspectives, especially political. With MDA's powerful reach within the government, this case is still being allowed on - this could signal a stance I haven't seen associated with a government under the Congress in a very long time.

Disclosure: I sold RPL just around the same time RIL was selling it, coincidentally. I'm still long some RIL, both through direct ownership and mutual funds.