Is OnMobile Global for sale?

A few weeks back, there was a rumour in the market that TCS was looking at the possibility of buying OnMobile Global. That remained a rumour and did not become news. Those who may have bought the stock on the basis of the rumour may be waiting for an opportunity to sell.

That opportunity may not be far away. As per a recent article in Business India magazine, OnMobile Global is on the block and the latest suitor is Idea Cellular (of the Aditya Birla group). Apparently, Idea is ready to buy a 60% stake in the company at a price of Rs 100 – which is 33% higher than today’s closing price of Rs 74.40.

If this rumour turns out to be true, then investors may be able to pocket a neat gain if they enter at the current market price. Acquisition of a 60% stake – or even a lower stake - will trigger an open offer to existing shareholders.

In a post on the telecom sector a couple of months back, it was observed that the OnMobile stock was trying to form a bottom by consolidating within a rectangular band between 54 and 73. It was suggested that the stock could be a contrarian bet, but with a strict stop-loss at 52.

In Jan ‘12, the stock crossed above the rectangular consolidation zone, rose to an intra-day top of 84 on Feb 15 ‘12 and briefly breached its falling 200 day EMA. It has now pulled back to the top of the rectangular band. An upward bounce can be used to add/enter.

What if the rumour about Idea‘s stake buy remains a rumour – like it happened in the case of TCS? The company is fundamentally strong, and its overseas businesses, which contribute nearly half of its total revenues, are supposedly doing well. Domestic business is under pressure. Q3 results showed 12% top line growth but a 11% dip in the bottom line.

With smart phones becoming cheaper by the day and 3G service roll-outs in progress, OnMobile’s expertise in value-added software services should see growing demand. Even if the stake sale doesn’t go through, it may be worth holding on to the stock. A buy-back by the management, with a ceiling at Rs 85, is currently in progress.

Why did Reliance announce a share buyback?

Regular readers of this blog know that I am biased against any company that has ‘Reliance’ in its name. So it should not come as a surprise that all actions by the Ambani brothers are viewed through a lens of strong suspicion by me.

If you are a dyed-in-the-wool Reliance investor, please don’t take umbrage at my tirade. Just ignore it. If you are considering an entry into this erstwhile darling of the Indian stock market, please read through and then decide.

The performance of Reliance companies have been less than stellar during the past couple of years. The stock market has punished all the group company stocks, including those of the big daddy of them all, RIL. The Ambani brothers have become wealthy beyond belief and have acquired notoriety by using various dubious means to circumvent the rules and accumulate the shares of their own companies. The hammering of Reliance group stock prices has dented their considerable personal wealth.

What better way to make a little extra cash than to announce a buyback before announcing Q3 results? RIL’s Q3 results – to be announced on Jan 20 ‘12 – is not expected to be great. That may lead to further selling of a stock that has already lost more than a third from its 2009 peak. The buyback announcement caused a price spurt – providing a nice opportunity to make a few extra bucks.

What will happen to small investors holding the stock? Not much – unless they use the current price spurt to book profits. Buybacks are a method used by companies ostensibly to ‘reward’ shareholders. How? Usually, the bought back shares are extinguished – which means they cease to exist. So, the equity capital of the company gets reduced and correspondingly, the EPS increases. The P/E ratio becomes lower, making the stock look more attractive valuation-wise.

But it all depends on how much of the equity capital gets bought back and extinguished. A similar buyback was announced six years back, but only a small percentage of the total equity capital was bought back. If it is a tiny percentage this time as well, it will have little or no effect on the EPS or P/E. RIL is likely to buy the shares from the open market – which means small investors will get no particular benefit.

A share buyback can be an indication that the management thinks that the shares are undervalued. It can also mean that the company is bereft of ideas about what to do with their money to enhance growth. More likely the latter, based on the totally unrelated ‘di’worse’ifications that the elder Ambani has undertaken of late – into sectors like retail, telecom, media.

Make no mistakes. The refinery business has been – and continues to be - a cash cow. But refinery margins are coming down and the gas business has been mired in controversies. None of the unrelated businesses have performed well so far. Technically, the chart looks weak and the stock price can fall to its 2009 low.

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