Reliance surprised all yesterday with a post market bonus declaration of 1:1….It last gave a bonus in 1997…and before that in 1983 and 1980
Dhirubhai Ambani,the Founder was the dramatic architect for all these bonus issues…but he passed away in 2002……Investors were like Children in those days…and the father was Dhirubhai !….his bonus announcements were always dramatic…like breaking an AGM to have a board meeting to discuss Bonus and coming back to announce a 1:1 Bonus…all pre planned
But yesterday’s Bonus was clearly less preplanned….and Investors are no longer Children…and Mukesh Ambani is surely not the father !
And I was truly amused to hear the reason why Mukesh declared this Bonus….To reward Shareholders for this Value Creation of over a lakh Crores in assets and the completion of setting up of two major projects….gas and the new refinery….Bonus is declared from Free Reserves created by Operational Profits …Reliance has enough of these…but not from the two new projects yet !….even brother Anil rewarded,if you can ,I daresay, call it that,! shareholders of Reliance Power with a 3:5 Bonus last year,within months of the IPO…even before the Company has commissioned even one power project !…the bonus was to bring down the holding cost from the obscene IPO Pricing of Rs 427.50 to Rs 270 ! It’s quoted at Rs 160 right now…so now both brothers have ‘rewarded’ with bonus after creating the assets !
The Bonus normally reinforces the expectation of good performance into the future,though it is merely an accounting entry….may change sentiment,but not valuations
In Reliance,the Equity now will double from Rs 1642 crs to Rs 3284 crs with just a small dent of Rs 1642 crs in reserves of over Rs 1.1 lakh crs…The Book Value will halve from Rs 700 to Rs 350…Adjusted EPS for FY 10 would be in the Rs 60-Rs 65 range.
The Share Price should open strong this morning…In fact it has opened at 4% high at Rs 2189 and is now easing….From this price the ex-bonus price adjusts to a shade below Rs 1100…that’s 16 P/E on FY 10 EPS and 11/12 P/E on a much stronger FY 11 EPS of close to Rs 90
And this declaration of Rs 13/share as interim dividend on existing capital of Rs 1642 crs is good but it works out at just a 10% payout of projected EPS in the range of Rs 120-Rs 130 for FY 10 before adjusting for bonus
And this Bonus and Dividend declaration is clearly a tool intended to raise shareholder sentiment given the acrimonious legal issues between the two Ambani Brothers….Ironically the Gross Refining Margin has dropped to a 26 year low of just US $ 3…and is not expected to revive strongly in the nexy year…..so if it was not for the Gas Profits that will now accrue to Reliance Industries,the Profitability would have been impacted
Investors are now mature…..A Bonus announcement should not significantly impact their outlook for Reliance Industries as Valuations do not get impacted
Wonder What brother Anil has to say about this Bonus ! ?….Wonder why no one in Media has bothered to get his View !…surely it would be interesting to hear him on this !