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ShareMumbai: In a move some see as a preparation for possible bad news on the legal front, Mukesh Ambani promoted Reliance Industries (RIL) on Wednesday announced a bonus issue of one new share for each share held.
The company's dispute with the Anil Dhirubhai Ambani group over supply of gas comes up for final hearing in the Supreme Court in two weeks.
"It is a masterstroke by the big brother," RK Gupta, managing director at Taurus Asset Management said. "Seems like he wants to please shareholders to get their support as the gas battle goes on."
The bonus issue comes after 12 years. In line with last year, RIL also announced a dividend of Rs13 per share, payable before the bonus issue. It would also be applicable to the new shareholders who came in through the recent merger of RIL subsidiary Reliance Petroleum (RPL).
Bonus shares are free additional shares that a company may decide to issue to its existing shareholders in a certain proportion to the current holding. So if a company comes out with a 1:1 bonus issue, as is the case here, an investor gets one additional share for every existing share he holds in the company.
While it makes no operational difference to RIL, it will have to double its equity
capital from around Rs1,670crore now.
The company will have to divert an equivalent amount from its reserves into the equity base.
A company may have built up reserves over the years by retaining a proportion of the profit and not giving it out as dividend. It converts a part of these reserves into shares to make the bonus issue.
Analysts read the move as a preparation for possible negative news flow.
The possibility has hung heavy on the stock for a while now. RIL shares have appreciated 32.9 per cent since April 1, 2009, as against a 69.7 per cent gain in the 30-share BSE Sensex.
Also, the company had raised Rs3,188crore barely three weeks ago by selling its treasury stocks at an average price of Rs2,125 per share.
"The total outgo on account of the dividend is Rs2,219crore and that takes away a large chunk of the money that was raised last month," said an analyst.
There was intense speculation last month when RIL announced it was selling around 1.5 crore shares left over from a seven-year-old merger process between itself and a former subsidiary.
The bonus is likely to drive up the RIL stock. Theoretically, the stock price should halve if a company issues a 1:1 bonus, since the number of shares doubles. But that is hardly ever the case.
In fact, investors look at it as a signal that the company will continue its good run in the days to come.
Would the management have distributed these shares if it was not confident of distributing dividends?
"I think they (RIL) wanted to convey to people through the bonus issue that the stock is undervalued vis-a-vis the fundamentals of the company and that you needn't wait until the outcome of the court case to buy it," said Deven Choksey, chief executive officer of KR Choksey Shares & Securities. "The re-rating process may start from Thursday."
"The management may be trying to neutralise the negative perception that came from the recent sale of treasury stocks," said Mumbai-based Amitabh Chakraborty, president, equity, Religare Securities. "The treasury stock sale gave out the perception that the current share prices have reached a cap."
"The market has not given a very good response to the stock after treasury stock sale. So this will definitely improve sentiment," said Gupta of Taurus.
Indeed, institutional investors who bought the treasury stock from the company at Rs2,125 per share stand to gain the most if the stock price goes up. Given that the stock has been largely stagnant since then, it would give them an exit route.
Market experts say all three streams of RIL's business --- oil refining, gas production and petrochemicals --- face bad news in the coming months. While the expected annual profit of Rs15,000crore from gas sales could decline by around 40 per cent if the courts decided in favour of Anil Ambani and the National Thermal Power Corporation, both refining and petrochemicals are off their recent peaks and may decline further, they point out.
Also, the company had total debt of Rs70,000crore against cash reserves of Rs20,000 crore as of end June.
"The investor sop (bonus issue) and the sale of treasury stock can be better understood as the company arming itself for any further deterioration in its outlook," another stock analyst said.
"In the short term, we do not see any significant impact of this move on share price. The consolidated profits are lower for this financial year and any negative impact of this would be offset by positive sentiments on account of bonus issue. In the short term, profits are not expected to rise substantially on account of declining petrochemical prices and softening of refining margins. However this move will have a positive impact on the scrip from long-term perspective," said Manish Sonthalia, VP - equity strategy, Motilal Oswal Securities.
In its statement announcing the bonus issue and dividend, RIL reminded investors that it had made great profits by investing in the company and emphasised that it was not facing any liquidity crunch. "Since its listing in 1978, total returns to shareholders are 25 per cent compounded. It has a strong balance sheet, large cash reserves and substantial financial flexibility owing to its treasury stock holding which have a current value of Rs40,000crore," it pointed out.
(With inputs from Nitin Shrivastava and Reuters)
