Cash-rich Reliance Industries, whose stock price has been battered over the past year, will consider a share buyback, the company said on Wednesday, sending its shares up as much as 4.4 per cent.
Reliance, an energy focused conglomerate controlled by Mukesh Ambani, India's richest man, saw its share price tumble 35 per cent in 2011, helping drag the benchmark Sensex down 25 per cent for the year, making India one of the worst-performing markets anywhere.
"This probably means they don't have any big acquisition proposal in mind for now and this is the only way to deploy part of surplus cash," said R.K. Gupta, managing director at Taurus Mutual Fund in New Delhi.
"Also, when you announce a buyback, you are basically setting up a floor price, which acts as a support price for the stock and the message to the market is: 'don't short my stock. I'll buy it if it hits the floor price,'" he said.
Reliance, which has been using cash to make acquisitions and expand beyond its core energy and refining business, is India's most valuable listed company. Its last share buyback was in 2005.
The company, which recently invested in the Indian media sector, plans to launch broadband services using fourth-generation (4G) technology, and has been accelerating its rollout of supermarkets.
It plans to invest $4 billion to $4.5 billion by 2014 on three US shale gas joint ventures it entered into in 2010.
Earlier this month, Bloomberg reported that Reliance is among companies in talks to buy the exploration and production (E&P) unit of US pipeline firm El Paso Corp.
The company said its board would meet on Friday to consider a buyback. Controlling shareholders in Reliance own 44.71 per cent of the stock, according to the Bombay Stock Exchange.
"This was not completely unexpected, as there was a feeling that if the stock was impacted to this extent, the company would move to buy up shares," said Deven Choksey, chief executive officer of K R Choksey Shares & Securities.
"The shares are very attractive at current levels, and when there is a chance to make 20 per cent return on their capital, Reliance don't miss that kind of opportunity," he said.
Reliance, which also reports its December quarter earnings on Friday, is widely expected by analysts to post a drop in profit from a year ago, mainly because of lower refining margins and a fall in output from its offshore gas fields.
The slowing gas output has also weighed on its shares.
Reliance had cash and cash equivalents of Rs 614.9 billion as of the end of September.