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Reliance Power Bhi Kabhi Bahu Thi…

…looks like the new TV serial in town. More melodrama. Now Anil Ambani wants to assuage investors in RPOWER by giving them bonus shares immediately after the IPO.

For a company which listed just a week ago, on February 11, the Reliance Power board surprised everyone on Sunday when it announced that it will meet on February 24 to consider a bonus issue.

The promoters, who hold an 89.5% stake, have excluded themselves from the proposed bonus entitlement.

They are offering you double your shares, and the price will fall to half (won’t it?). Given that the promoters own 90% of the company (45% by ADAG, and 45% by Reliance Energy) they are now saying that the public, which owned about 10% will now own about 20% (actually around 19%).

That also means the price will be adjusted downwards by that much, that’s the way the market works. More shares means lower prices.

So another drama will unfold as people tell you “first time anyone has given bonus within 15 days of listing” and all such bull. Bonuses should be from retained earnings, not like this. And bonuses hold no value in today’s day and age when your net holding is going to be valued exactly the same.

But it may benefit the individual shareholder as the price may be adjusted downwards by only 10% (since the promoters don’t benefit) and each shareholder gets 2x his shares. But you know what is likely to happen? The share price will halve. That’s the way an economic bazaar works. If people are selling x shares at Rs. 380, they will sell 2x shares for as low as Rs. 190.

I have to see how this pans out. There is no “value” here – please remember that Reliance Power was a momentum IPO, and the concept of value did not arise. The stock discounts its earning five years later by more than 20 – today we don’t give fast growing stocks 20 P/E on one years earnings, and they asked us to pay 20 on earnings after five. So let’s not really talk value. If the price reaches Rs. 50 maybe there is value, but not here. This is a momentum stock, and don’t disregard the power of momentum – the movement may still be upwards.

Disclosure: No positions.

  • Nilesh says:

    >”There is no “value” here” – i do not agree with this.

    ADAG for sure letting go of some of money it made in this ipo. here is how it is.

    earlier if i had net profit of x (after 5 yrs) on 100 shares so EPS was x/100. let assume i have one share out of 100 shares. so my share of profit is also x/100.

    now i will have 2 shares out of 110.5 shares. so my share of profit will be 2x/110.5

    i.e my share of profit become 1.81 times what i was getting earlier.

    1) if it was valued 20 times EPS of 2013, it is now 11.05 EPS of 2013.

    2) now i should be able to sell my 2 shares at 1.81*333 (minimum trading price so far on NSE) i.e abt 600.

    anyway it does not negate the fact that this ipo was priced at very high end. buying it today (through IPO) was like buying infosys at peak of 2000 IT bubble.

    ADAG has got big dent on their image through this IPO and they only are trying to repair it to some extent.

  • Nilesh says:

    >one more thing this 600 Rs price is under ideal conditions so as you said it, for sure price will go down to 150-200 levels after bonus shares are allotted.

  • Deepak Shenoy says:

    >nilesh: The “value” I mentioned was with respect to RPOWER, not this particular bonus announcement. Sorry for the confusion.

    Still, one point – it was valued at 20x 2013 EPS. But not anymore. It will temporarily go up – like they all do – and then crash when they all realise there is no underlying value in the share.

    Yes, your share of profit goes up 1.81 times than earlier. yet, that increased profit may not result in a good buy because the market may pay lesser for it than they are paying today. So your 1.81 times profit may still result in a lower market price than today.

  • amit sinha says:

    >you are ignoring the fact that of the total market cap, investors will hold 19% instead of 10%. This amounts to adjusting the issue price downwards without explicitly saying so. the market performance has actually forced them to part with a larger slice at the same cash inflow.

  • Guruprasad says:

    >Is it legal to announce bonus share for a company where there is no balance sheet. SEBI was weak, weaker and now weakest regulator in the world. This IPO deserves ban. But due to money and muscle power(No brain power ofcourse), Mr.Ambani came with an IPO which creates bad perception about Reliance. Inorder to overcome that perception he is bullshiting about Bonus shares. Line of IPOs are expected from Reliance stable. They don’t have money. They want to collect money and would like to invest in their projects. Reliance power could become next Enron. Only god could save investors, since regulators have been bribed.

  • Anonymous says:

    >Who says ADAG is letting go some money from his pocket..? The fact is.. just by looking at sell orders on monday anyone can blindly say it is ADAG’s people only who are still making money with this news and stock going 11% high and 5% low in same day.
    If he was that honest then with the declaration of bonus the ratio would have also been disclosed which is not the case here and have left for market to imagination and stock now doing nice situps..
    Talking about regulator ..hmm do we have any ? creature called Damo… has already done a swift exit.