RELIANCE POWER BONUS RATIO ?

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!