Is it profitable to take fresh positions in Reliance Power ?
The board of Reliance Power is due to meet this Sunday to discuss the bonus share issue.
The discussion will revolve around two things. One is the bonus ratio and second is the fair price, the current market price of the stock which is fairly valued as the stock is going to ultimately correct to that appropriate value after the bonus shares are issued. Suppose a person takes a position today at Rs 420 per share, if the bonus ratio is 1: 5, the cost price is going to come down to Rs 350. If its 1:4, then it works to Rs 336. At 1:3, it is Rs 315 and at 1:1, the cost price is going to be Rs 210. So, that is the cost of acquisition for individual players.
The second thing an investor will need to check is what is the fair price. Let us consider a scenario of the bonus ratio being 1:5. The fair price would then be Rs 350, without bonus or ex-bonus. Due to only some shareholders getting bonus shares, the ex-bonus value is going to be Rs 343. So, my cost of acquisition is going to be Rs 350. But the stock price is going to stabilize at around Rs 343, which is the base case scenario. Hence, I will make a loss of about Rs 7 per share.
A bonus ratio of 1: 5 and an equilibrium price of Rs 350 is the scenario which the market is taking.
But in the second case, where the bonus ratio is 1:3 and the fair price is Rs 350, the stock is going to stabilize at around Rs 339. So, one would make a profit of Rs 11 per share. One has to be very confident about what the bonus ratio and the fair price would be. These are the various scenarios which one can play out.
To simplify, I have done some analysis looking at what one believes should be the fair price to make a profit. If one believes that the bonus ratio is going to be 1:5 and the fair price is above Rs 357, then there is money to be made. At 1: 4 it is Rs 344, at 1:3 it is Rs 326, and at 1:2 it is Rs 294. At 1: 1, the market value should be Rs 231, which is about Rs 190 discount to the current market value. Only then there would be some money to be made.
It is actually too good to be true that money can be made. A few market analysts say that the various scenarios could pan out. There is a lot of negative sentiment attributed to this particular stock from the listing. That is the reason why people may not be going overboard on this scrip. So, one may not know what Reliance Power is going to pull from under its sleeve apart from this bonus issue
Dear Sir,
Few points worth considering :
1. Whether the Bonus shares are proposed to be issused from company’s existing reserves or the premium collected in the recent public issue?
2. Post Bonus issue, the networth will get spread on larger no. of equity shares and ex-bonus price of the share on the stock exchange is expected to be lower than the present price.
Hence, the benefit of bonus shares may not be real but psychological.
May be few experts can throw more light on these points.
Warm regards,
Bakul
Dear Sir,
Few points worth considering :
1. Whether the Bonus shares are proposed to be issused from company’s existing reserves or the premium collected in the recent public issue?
2. Post Bonus issue, the networth will get spread on larger no. of equity shares and ex-bonus price of the share on the stock exchange is expected to be lower than the present price.
Hence, the benefit of bonus shares may not be real but psychological.
May be few experts can throw more light on these points.
Warm regards,
Bakul