The biggest question in the market today is – what would be the expected ratio of bonus to be announced by the management of Reliance Power Ltd. (RPL) on Sunday 24th ? Will it be 1 bonus for 2, or I for 3 or I for 1 ?
And if anyone manages to give an answer to this question, then immediately the next question which pop’s up is - where will the share price head after this announcement ?
We have done some number crunching and feel that the expected ratio would be 1 for 2. If it is made at 1 for 1, this would result in a huge loss of market capitalization and if it is 1 for 3, the share price may fall below Rs.400 per share, on cum-bonus basis.
As we all know, the basic purpose and sole intention of the bonus issue is to bring down the cost per share of an investor, having acquired shares of the company, in its IPO either at Rs.430 or at Rs.450 per share. The share price is yet to cross the IPO price since the listing day (that too,maybe for few moments on the listing day). So, it would always be a desire to see that the effective price of share rules above its issue price.
Looking at the intention and desperation of the investors, majority of them want to exit from the stock, (though over 40% original allottees, have moved out after booking losses while there is very less investment appetite in this long gestation energy company. In this scenario, it is futile to look for a base price (ex-bonus) or even try to make an arithmetical adjustment in the stock price, based on the extent of equity dilution percentage.
It is merely the bonus expectation which is keeping the share price rule above Rs.400, while any kind of liberal bonus ratio may not be able to take the share price to cross Rs.500 mark. In this background, let’s see what could be the bonus ratio?
Ratio of 1:1
If the company proposes to issue bonus in ratio of 1 : 1, and as stated above, share price may go upto Rs.500 per share. On ex-bonus basis, share price would correct to Rs.250 per share. This would increase the company’s equity capital from 226 crore shares to 248.80 crore shares, resulting into a market capitalization of Rs.62,000 crore, on post bonus, at Rs.250 per share. The present market capitalization of the company is Rs.92,600 crore at Rs.410 per share while it was at Rs.87,000 crore, at Rs.385 per share, at which it closed before bonus announcement. So, management would not be too keen to go for this ratio.
Ratio of 1:3
If ratio proposed is 1 bonus share for every 3, this would be definitely below market expectation, and can see share price sliding below Rs.400, which would defeat the basic purpose and objective of the management, for which management may not take risk and chance. Even if it is presumed that it is accepted by the market and share price remains at this level, shareholders would not get compensated. Prospects of share price crossing Rs.450, is remote with this ratio.
Ratio of 1:2
If ratio of 1 bonus share for every 2 share is proposed, share price has chances of moving to Rs.450, which would result in share price ruling at Rs.300, on ex-bonus basis. In this situation, the objective of bonus issue shall get achieved and market capitalization of the company would also be at Rs.71,000 crore as post bonus equity of the company, would rise to 237.40 crore equity shares.
As stated earlier in our Cover Feature of 18th February, those shareholders, holding shares of RPL on record date, would be the only one’s eligible to receive bonus share and record date is not likely to be on or before 31st March, 2008. So, original investors of IPO, having sold and booked losses, will not be able to make good their losses or stand to gain from the proposed bonus issue.
Also we wish that no legal hurdles comes in the way of this bonus, as it is issued only to non-promoter category, inspite of the entire share capital of RPL being pari – passu. Since, Reliance Energy (REL), a listed company of the group is also a promoter, presently holding about 45% stake, any shareholder of REL can challenge this move of excluding promoters from bonus entitlement, inspite of all shares being pari – passu.
To recap the whole discussion –
1) Bonus ratio is likely to be 1 bonus for every 2 shares held and in that event share price would rule at Rs.450 on cum-bonus and at Rs.300 on ex-bonus.
2) Bonus ratio of 1 : 1 may see share price to reach a maximum of Rs.500, which would eventually, result in market capitalization of the company to fall to Rs.62,000 crores.
3) Bonus ratio of 1 for 3 shares could see share price falling below Rs.400, thus defeating the basic objective of bonus move.
4) Ex-bonus price adjustment would not happen to the extent of post-bonus public shareholding, but much more.
5) An equilibrium needs to be drawn by the management, between bonus ratio and market capitalization.
6) Under any situation, share price would not cross Rs.500 and may not fall below Rs.400, per share, on cum-bonus basis.
7) Ex-bonus share price should rule between Rs.275 to Rs.325 per share, depending upon the bonus ratio.
8) The final conclusion likely to get drawn may give an impression that whole exercise was futile and unwarranted.
9) Shareholders of RPL (original allottees as well as secondary market buyers) would be keen to exit, post bonus announcement, as investment appetite is missing from the counter.
10) There exists no arbitrage opportunity between cash and F&O segment, as future outlook is bearish on the stock, with caution on bonus ratio.
Let’s see how things pan out. Keep your fingers crossed!
Monday, February 25, 2008
RELIANCE POWER BONUS RATIO ?
Sunday, February 24, 2008
Grey Market Prices-24-Feb-08
Latest Grey Market Premium Dt.
| Company Name | Offer Price (Rs.) | Premium (Rs.) | Kostak (Rs. 1 Lac.) |
| Rural Electrification | 90 to 105 | 23 to 25 | -- |
| GSS | 400 to 440 | Discount | --- |
| IRB Infra | 185 | 12 to 15 | -- |
| Manjushree Extrusion | 45 | 5 to 7 | -- |
| Tulsi Extrusions | 85 | 7 to 10 | -- |
| V. Guard | 80 to 85 | 12 to 15 | -- |
Listing on 25th February (Monday)
IRB Infra (532947) B1 Group (F & O Lot: 1100 Shares)
Tulsi Extrusions (532948) B1 Group
IPO Subscribed
| | V. Guard | REC |
| QIB | 1.74 | 39.30 |
| HNI | 2.91 | 27.12 |
| Retail | 4.24 | 7.67 |
| Employee | 0.85 | 0.94 |
| Average | 2.70 | 27.91 |
Wednesday, February 20, 2008
V-Guard: Take guard from it
V-Guard Industries is entering the capital market on 18th February 2008, with a public issue of 80 lakh equity shares of Rs.10 each, in the band of Rs.80 to Rs.85 per share.
The company is presently into manufacturing and marketing of Electronic Voltage Stabilisers (42% of total sales in FY 07) Cables (20%) Pumps (19%) and various other electrical items like Water heaters (11%) UPS (4%) and Fan and other products, of about 5%. The major component of topline is from trading turnover. In FY 07, of total income of Rs.223 crores, Rs.170 crores came from Trading, on which, EBIT was at Rs.20.02 crores, resulting in a margin of 11.80%. However, manufacturing products gave an income of Rs.52 crores with EBIT of Rs.4.90 crores, resulting into a margin of 9.40%. So, why to have manufacturing, when trading gives a better margin?
Even, first 5 months of FY 08, had trading topline of Rs.80 crores, while manufacturing topline was at Rs.30 crores. During FY 07 and FY 08, the company earned Rs.27.70 crores, being profit on sale of long term investments, net of taxes which has resulted into a higher net worth of the company, at 31-08-07, at Rs.58.68 crores.
The company is now proposing to set up cable manufacturing unit at Coimbatore and Uttaranchal, as also enameling plant, pilot production plants and service and distribution centres. The total capex is estimated at Rs.70 crores. Adding General Corporate purpose and issue expenses, total fund requirement could be about Rs.85 crores, which is proposed to be financed by proposed IPO. At the upper band of Rs.85, total mobilization would be Rs.68 crores. So how shortfall would get met ?
The present equity of the company is very high at Rs.21.85 crores (thanks to 600% bonus issued on 09-09-06) which would rise post-issues, to Rs.29.85 crores. FY 08 EPS, on expanded equity, would be at around Rs.6 per share. Any increase in level of activity, puts huge pressure on working capital of the company. As at 31-08-07, investory of Rs.42 crores and debtors of Rs.34 crores, results into over 105 days sales. It is easy to ramp up topline as also earn profit by buying in cash and selling it on credit.
New project of the company, would not be contributing in FY 09 and hence expanded equity of Rs.29.85 crores, needs to be serviced from present operations. EPS of Rs.6 for FY 08, discounts issue price, at the upper band by about 14 times. Even if it is presumed that price gets discovered at the lower band of Rs.80, it works out to 13 times. This kind of discounting is not even available to mid size electrical equipment makers. Prominent amongst them are Stone India, Lakshmi Electrical Control, Indo Asian, Asian Electronics, Salora International, Compact Disc etc.
Since major component of topline and bottomline of the company is derived form trading, market would not give good discounting to the stock. Too much product profile of the company, also, leaves it into non-classified category and non-focussed. In this state of primary market, it is unlikely to get received and accepted by the market, when so many better plays are available in the secondary market.
Better to remain away and guard your money from such issues.
REC-Let there be Light
Rural Electrification Corporation is entering the capital market on 19th February 08, with a public issue of 15.61 crore equity shares of Rs.10 each, in the band of Rs.90 to Rs.105 per share. 50% of this issue is by way of fresh issue while 50% is by way of offer for sale.
After the recent debacle of many IPOs, this is one of the mega issues, which intends to mobilize Rs.1,640 crores. It has been seen that PSU IPOs have been reasonably valued. This maybe due to the conservative approach of issuer’s officials, as also, no personal interest is involved, as sailing through the issue is more important than the valuation. This issue falls in this category.
The company is a public financial institution, engaged in the financing and promotion of transmission, distribution and generation projects throughout India. The company, all along has been financing public sector projects, but has been shifting to joint sector and private sector, in view of mega power projects, now being set up by the private sector. As at 30-09-07, total of Rs.35,050 crores has been financed by the company, of which 96.33% has been to the public sector.
For FY 07, the total income of the company was at Rs.2,933 crores with PAT of Rs.776 crores, giving an EPS of Rs.9.95 on equity of Rs.780.60 crores. First six months of FY 08 seems to be quite good with topline at Rs.1,792 crores and PAT of Rs.523 crores, which results in an annualized EPS of Rs.13.40. Even on fully diluted equity of Rs.858.66 crores, this would be close to Rs.12.20. The present book value, as at 30-09-07, is at Rs.54, which would rise to Rs.63 to Rs.64, depending on the price discovery, post IPO.
Fresh infusion of Rs.700 crores to Rs.800 crores, into the company would be EPS accretive and 82% government stake, post issue, is also an assuring feature. The funds are mobilized mainly to augment capital base to meet future capital requirement of improved business and to list the shares.
We feel that in this turmoil, when primary market is not at all comforting with any good IPO, this is a better issue, where investors can safely apply for reasonable gains.
Sunday, February 17, 2008
Grey Mkt Prices
Public Issues (IPO) Dt.: Company Name Open Date Close Date Issue Size Offer Price Rating Recomm. SVEC Construction Ltd. ( Withdrawn GSS ( 35 Lac Shares (Rs. 154 Cr.) 400 to 440 36 % Avoid V. Guard ( 80 Lac Shares (Rs. 68 Cr.) 80 to 85 42 % Average Rural Electrification Corp ( 156120000 Shares (Rs. 1639 Cr.) 90 to 105 48 % Attractive Globus Spirit Ltd. ( Withdrawn Latest Grey Market Premium Dt. Company Name Offer Price (Rs.) Premium (Rs.) Kostak (Rs. 1 Lac.) Rural Electrification 90 to 105 24 to 26 2100 to 2200 GSS 400 to 440 Discount --- KNR Construction 170 Discount -- On 440 20 to 25 -- Bang Overseas 207 7 to 10 -- Shri Ram EPC 300 Discount -- IRB Infra 185 12 to 15 -- Manjushree Extrusion 45 5 to 7 -- Tulsi Extrusions 85 10 to 15 -- V. Guard 80 to 85 8 to 10 -- SVEC Construction Limited IPO has been withdrawn after poor response from investors.