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Monday, February 25, 2008

How much will Reliance Power gain ?


Assuming market perception of Reliance Power Ltd’s firm value hasn’t changed from the pre-bonus announcement levels of Rs86,897 crore, the company’s shares could jump as much as 39% on Monday from last week’s close of Rs417.
What the 3:5 selective bonus issue essentially means is that non-promoter or minority shareholding would increase from 10.09% to 15.22%. Their stake is now worth Rs13,226 crore and since the shares trading in the market currently are cum-bonus, each share would be worth Rs580 (minority shares stand at 228 million). As a result, retail investors who have held on to their share will gain about 35%, while other investors will gain 29%.

Bridging the Gap

High net-worth investors who borrowed funds to buy shares in the initial public offering would manage to break even since their cost of acquisition was about Rs560 per share. But most of them tend to book losses on listing.
While arbitrageurs will rush in to bridge the gap between Friday’s close and the sudden change in the cum-bonus share value, they would also be mindful of the short-term capital gains tax of 10%, due to which Reliance Power shares may trade slightly lower. Once the bonus issue becomes effective, 136.8 million new shares will be issued to minority shareholders, which means the ex-bonus share price should be around Rs362.

As pointed out right at the outset, these calculations depend on the assumption that Reliance Power deserves a value of Rs86,897 crore, the level it traded at before the bonus issue was mooted. This may not necessarily be the case, especially after reports late last week that the government of Haryana has imposed damages on Reliance Energy Ltd for its failure to meet a deadline for a 600MW thermal power plant. Reliance Power, which is involved in ­larger projects, gets a large part of its value because of assumptions of timely ­execution.

Leave alone penalties from authorities, if projects are not completed on time, estimates of cash flow will go awry and firm value will deteriorate. Those waiting to jump in and gain from the lucrative bonus issue should be mindful of this risk.
Reliance Energy shareholders, too, have some reason for cheer. It was first assumed that its stake would reduce owing to the bonus issue to only minority shareholders, but it now turns out that its stake will be maintained at 44.96%. In that case, the 9% erosion in its value last week seems overdone, and its shares should also rebound, unless reports about the penalty in Haryana continue to weigh down valuations.

While public shareholders in Reliance Power have reason to rejoice because of the liberal bonus issue, the attached table shows that it hardly cost promoters anything. Anil Ambani’s investment in the firm has been all of Rs1,720 crore. Even after the dilution in his stake owing to the selective bonus issue, his shares are still worth Rs34,600 crore

Via Mint