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Sanjay Sardana
NEW DELHI, Aug 12: The bonus issue by Reliance Industries last year appears to have been a curse on the investors. More than a year after the company rewarded its shareholders with free shares, Reliance Industries' stock (adjusted for bonus) has dipped to its 20-month low of Rs 122 and has failed to add any value to the shareholders. More, its market capitalisation is down 43 per cent today.
While the poor discounting can be partly due to the overall market sentiment, an excessive supply of paper has diluted the company's sound performance in a year of economic slowdown. The last time Reliance's scrip tested the Rs 120 level (bonus adjusted) was in July 1996, and it plunged further below the three figure mark to Rs 90 (bonus adjusted) in December 1996.
Just before going ex-bonus, Reliance's market capitalisation stood at around Rs 19,950 crore and almost nine months later, it stands eroded by almost 43 per cent at Rs 11350 crore. The equity expansion has also pulled back the earning per share (EPS) from NEW DELHI, Aug 12: The bonus issue by Reliance Industries last year appears to have been a curse on the investors. More than a year after the company rewarded its shareholders with free shares, Reliance Industries' stock (adjusted for bonus) has dipped to its 20-month low of Rs 122 and has failed to add any value to the shareholders. More, its market capitalisation is down 43 per cent today.
While the poor discounting can be partly due to the overall market sentiment, an excessive supply of paper has diluted the company's sound performance in a year of economic slowdown. The last time Reliance's scrip tested the Rs 120 level (bonus adjusted) was in July 1996, and it plunged further below the three figure mark to Rs 90 (bonus adjusted) in December 1996.
Just before going ex-bonus, Reliance's market capitalisation stood at around Rs 19,950 crore and almost nine months later, it stands eroded by almost 43 per cent at Rs 11350 crore. The equity expansion has also pulled back the earning per share (EPS) fromRs 28.8 in 1996-97 to 17.7 in 1997-98. A lower EPS too has affected the stock's valuation. Without the bonus, the company's EPS would have been more than Rs 35 for 1997-98 and at the current price earning (PE) discounting of around 8 the stock would have been valued at around Rs 280.
Reliance's equity swelled to over 931 crore, thereby, resulting in a substantial increase in the floating stock, which has pulled down the stock substantially. At the time of the bonus, doubts were raised against the substantial increase in equity. Doubts were raised not about the company's ability to service the equity, but the fear of excess floating stock pulling down the stock. Analysts at that time felt that a liberal 1:1 bonus in the case of Reliance may not add any value to the shareholders' wealth.
Further, the company's equity is expected to swell by around Rs 100 crore due to conversion of debentures and warrants in the coming years.
The winners in the case of Reliance have only been those investors who sold thestock cum-bonus. For almost four months the stock was cum-bonus and it went ex-bonus in October last year. Before going ex-bonus, the scrip touched a high of around Rs 440.
Immediately after the scrip went ex-bonus last October, the scrip lost Rs 50 in just over a month to Rs 148. After recovering to Rs 202 in April this year, the scrip has been ruthlessly hammered to the current level of Rs 122.
Although the Ambanis did respond to the long standing market demand for a bonus issue, it has hardly brought any cheer to shareholders. The scrip after going ex-bonus in October last year at around Rs 200 has lost more than Rs 78 or 39 per cent to the current level of Rs 122. At the same time, the BSE 30-share sensex during the same period has lost less than 17 per cent to around 2950 points. Thanks to the massive equity expansion, the company has lost its market leadership. The equity after the 1:1 bonus swelled to Rs 931.9 crore. A substantial increase in the floating stock resulted in the stock being hammeredafter going ex-bonus.
However, liberal bonus issues in the case of multinationals have not resulted in the erosion of shareholders value. In many cases, the scrips have bounced back after going ex-bonus. One prime reason is that most of the companies are in the FMCG or pharmaceutical segment which have not seen any slowdown. Also, their equities, even after frequent bonus issues, are within manageable levels.
A new set of stocks have taken traditional market favourites' place. Stocks like Zee Telefilms, Dr Reddys, Novartis and Britannia are today's stars.
Also, the information technology stocks like Infosys, Wipro, Satyam, Pentafour are attrtacting a much higher discounting than the old favourites like Reliance, Tisco, Telco and ACC. Reliance's scrip at Rs 122 is trading at a price earning multiple of under 8 against 72 of Infosys, 52 of Satyam Computers, 49 of Britannia and 30 of Dr. Reddys.
It must be emphasised here that those who continue to do well on the market even after a bonus are the oneswith small equity base. Can a company with large equity base offer a bonus without eroding shareholder value in the short- to medium-term? The Reliance experience could be an eye-opener.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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