Sunday, February 17, 2008

Reliance power continues to baffle

After managing to get people to pay multiple times the cost of comparable companies for its shares in IPO, Reliance Power now wants to issue bonus shares to "effectively reduce the cost of the company's shares".

Where do these people come from ? Do they get manufactured in a lab which has a sign outside that says "leave all metal objects here and also your brains"?

Lets list all the reasons why this is stupid.
1. Bonus shares expand the equity capital by capitalizing the reserves.
2. Bonus shares effectively reduce the market price of the shares by a proportionate amount since the number of shares in the market will increase, reducing the resulting EPS (in R Power, there is no EPS to speak of anyway, since there are no earnings :P, but lets not worry our brains about that now)
3. Bonus shares are normally issued when the book value per share is really high and promoters want to indicate to shareholders that the business is doing well and a capital expansion through of bonus can be supported by future earnings growth. Why in the world would R Power want to do this when there is zilch earnings, leave alone growth ?
4. Issuing a bonus will bring down the market price as mentioned in point 2. So lets assume the bonus ratio is 1:1 (for every share you hold, you get one bonus share). The market price is Rs 385. The market price is effectively based on some future earnings figure divided by the number of outstanding shares. Since number of outstanding shares will double, the market price should come down by half. So now I will have 200 shares, priced at Rs 192.50. Big deal !

Rather than creating more paperwork with additional shares (after all, its an admin hassle and money will be spent on the issuance), R Power should concentrate on putting up their projects on time or sooner to deliver value to shareholders.

Disclaimer : I do not hold R Power shares.
Suggestion : NTPC seems a much better pick in the same sector.


Anonymous said...

If bonus shares will be issued to promoter also, then ur point is valid. Investor won't gain anything.

But since bonus share won't be issued to promoters, its good for investor(Not sure how much).

something is better than nothing

ShareKhan said...

Bonus shares never have the effect of giving away anything to shareholders for free. Its a misconception in India that they do. Even if promoters arent going to get bonus, the effect on the paid up capital and resulting EPS will result in the post-bonus value of the share coming down (if it doesnt its a market anomaly). If you still believe that bonus is good in this case, all the best.