In the run-up to the current AGM, speculators remained optimistic and ran the stock up almost 50 per cent to Rs 2,400. Despite repeated warnings from the company management that no bonus would be considered, the hopes persisted. This time around, the market expectation was for a even higher bonus ratio than the previous time.

This annual shareholder/management ritual is unnecessary. It should occur to the very vocal shareholders at the AGM that an issue of bonus shares is not a very good idea from their point of view as it does not enhance shareholder value in any way. Shareholders are barking up the wrong tree for what they should instead be demanding from the management is a higher dividend payout. In the past, shareholders of other companies(like in Great Eastern Shipping's case a few years ago) have forced managements to increase pay-outs during AGMs.

The managements contention that issuing a bonus issue at this point will hamper cash flows also does not make sense. The rational expectation from a bonus issue is not the additional shares itself but the promise of an additional income in the form of a higher dividend (after adjusting the rate of dividend for the split). However, if it is higher dividend that shareholders want, the company can give it to them without altering the equity structure. An increased dividend does not affect the free cash flow in any manner.

But the fact that the management has not increased the rate of dividend for several years (with the exception of their jubilee year last year) indicates their unwillingness to do the same post split, which will be disastrous for the stock. There have been a number of studies to prove that when managements declare bonus issues and do not follow it up with an increased pay-out thestock suffers in the longterm.

The MRF shareholders are in a unique position where the company enjoy's a very high return on equity but pays out only a miniscule portion of that return to the shareholders. The company pays out just seven per cent of the net profit as dividend, while at the same time, it carries a very high degree of financial risk since over two thirds of its assets are financed with debt. Now, the choice is between compensating the shareholders for the disproportionate risk carried or reducing that risk. A bonus issue in no way reduces that risk.

A better way would be to offer a liberal issue of rights shares to shareholders. The proceeds of that rights issue could be used to repay a portion of the substantial debt load, allowing shareholders to enjoy a higher return. Valuations will improve following the reduction in the financial risk.

On way to full year losses

The expectation that was built into the Ashok Leyland stock towards the end of February was that the sales hadincreased dramatically during that month, which also would be a record performance for the year. The expectation was for a increase in sales to over three thousand vehicles in February, while the figure in the previous month was just 2300 vehicles. Speculators had cited the increased depreciation benefits and the relaxations in claiming depreciation given to commercial vehicle owners for the increased offtake.In order to maximise these benefits, it was widely expected that commercial vehicle manufacturers would concentrate purchases in the last couple of months.

So far, that buying has not materialised. But the optimism that the last month of the year will bring about the elusive jump in sales is still being reflected in the share price. But otherwise, the company is on its way to reporting a loss for the full year. For the last nine months of the current financial year, the company has reported a net loss of Rs 49 crore.