Reliance announces bonus issue and dividend
Bonus Issue: Reliance Industries Ltd (RIL), at its board meeting held on October 07, 2009,has recommended the issue of Bonus shares in the ratio of one equity share of Rs10 each,fully paid up, for every one equity share of Rs10. After the bonus issue, the equity capital of the company will rise to Rs3,286cr from the existing Rs1,643cr. The issuance of the bonus shares is not likely to have any impact on the fundamentals, as the numbers of shares will increase and the stock price will come down; hence, the wealth of the shareholders will remain the same from a fundamental perspective. However, the bonus issue is a positive, sentimentally.The announcement is particularly significant after the recent sale of treasury shares by the company. This is because a section of the investors perceived the treasury share sales as a negative event, capping the stock price upside in the short term. Notably, RIL's stock has fallen by 3.9% after the announcement of the treasury-share sale, while the Sensex has gained 0.8% over the same period. The last time RIL had issued a bonus was in 1997; thus, such an issue has come after a period of 12 years.
Dividend of 130% (Rs13/share): Further, the Board has maintained dividend at 130% (the same as last year), and declared a dividend of Rs13 per share, aggregating to Rs2,210cr, as compared to Rs1,631cr last year. Shares issued to RPL shareholders are also eligible for dividend.
Consolidated Results: RIL also announced its audited consolidated financials yesterday. The company reported an increase in its consolidated net sales by 10.3% to Rs151,224cr (Rs137,147cr). Operating profits during the year registered a growth of 2.8% to Rs23,792cr (Rs23,144cr). However, EBITDA margins during the year were lower at 15.7% (16.9%), on account of higher crude oil prices. The Net profits from operations were down by 2.5% to Rs15,296cr (Rs15,324cr). The reported Net profits, however, were lower at Rs14,968cr (Rs19,521cr), largely on account of an extraordinary income of Rs4,197cr during FY2008.
Outlook and Valuation
RIL's stock price has borne the brunt of adverse developments on account of the negative news flow on the gas litigation front between the Ambani brothers and on lower Refining margins. However we believe that the current price has discounted the worst-case scenario and that there can be a positive upside for the stock. Although it is difficult to predict the outcome of the gas tussle, with the government's intervention the case gets strengthened in RIL's favour. The MoU is against the government's prioritisation policy, it affects the national interest. The government has also raised its concerns over the arm-length pricing of the gas. Moreover, ADAG's gas-based power plant is likely to come up by 2015. Hence, the ADAG group cannot utilise the gas during the interim period, since trading on gas is not permitted in India. We believe that the positive news flow from the exploratory space is likely to be the key driver of the stock price. We continue to remain positive on the stock, with a Target price of Rs 2,340.
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