The Bonus Bonanza

The announcement of the 1:1 bonus by RIL took the scrip price to a new high.

But what will the ex-bonus price settle at?

Little doubt that the announ-cement of a 1:1 bonus issue by Reliance (RIL) left investors in awe and gave speculators a bonanza. The share price jumped 12 per cent last week to touch a 52 week high of Rs 380.

More importantly, the decision has triggered off a debate on several issues and The Smart Investor has attempted to answer some of these. Investors are trying to zero-in on a band at which the ex-bonus price of the share would stabilise. For instance, some market watchers are of the view that Dhirubhai Ambani's announcement of willingness to buyback RIL shares will hold the share price up even post-bonus.

 

However, others vary on the view. The bonus and the buyback need not be viewed together. Very soon, it is likely that corporates make this provision. Buyback is only an option that RIL is keeping open. If a company has cash and buyback is the best investment at any given point in time, it could be utilised. says Ravi Mehrotra, chief investment officer, ITI Pioneer AMC.

Also, projecting an earnings growth accurately is difficult in RIL on account of the outstanding coversions of warrants and euro-convertible bonds (ECBs) that will change the equity and therefore the earnings. RIL had issued ECBs due in 1999 at 3.5 per cent to be converted into 1.52 crore equity shares with a strike price of Rs 288. ECB holders may find it lucrative to exercise the option to covert to equity at this price and juncture, to take advantage of the bonus issue.

Meanwhile, the grey area is the conversion of warrants which could bring in an additional six crore shares to RILs equity. All these together would take the equity up to Rs 1,074 crore.

The obvious question therefore is whether the company could service the equity. Petro-chemical watchers reckon that the cycle will bottom out this year. The biggest edge for RIL is its global scale plants and extent of backward integration that protects it from the cyclical fluctuations that haunt most other players. Starting from the naphtha cracker, it has the chain completing at the fabric stage.

Going by the Chelliah Co-mmittee recommendations, the present duties in various products are close to recommended levels, thereby reducing the sensitivity of earnings.

Besides, 1997-98 will see a true addition in terms of operational income. There has been close to 60 per cent enhancement in capacities of most of its products, says P Krishnan of Anush Shares and Securities. The naphtha cracker also went onstream in the first quarter of 1997-98. In short, the stage is set for not only for sound margins but also good volume growth.

No doubt, RIL is an index stock whose price is driven largely by sentiment. Yet for the behemoth which is in a globally sensitive business, the financials look sound. RILs long term debt:equity ratio is around 0.8. Foreign debt constitutes around 60-63 per cent of the total debt, largely accruing from its overseas borrowings. Of course, this ratio could move adversely or favourably with a change in the exhange rate. For instance, if the rupee strengthens, the debt-equity ratio would improve and vice-versa. Interest costs are also low which in turn strengthen its margins. In 1996-97, return on networth was 16 per cent.This will improve with the commissioning of new capacities and plants during the current and next year.

The game now is to project the net profit for the current year. Although turnover may indicate the extent of growth, it is not a critical figure in RIL as it reflects inter-divisional transfers. To cite an example, PFY sold to the fabric division is accounted as sales by the former and treated as an expenditure under raw material cost by the latter. Although an optimistic estimate of net profit for 1997-98 is Rs 2,000 crore, analysts are comfortable with Rs 1,700-1,800 crore. On fully diluted equity, this translates into an earnings per share of around Rs 17-18.

With a fresh settlement opening on Monday, volumes in RIL could be heavy. Although some profit taking may happen, marketmen reckon that another rally may drive the share upto Rs 400 just before it turns ex-bonus, after which the share may trade in a band close to Rs 200. Given the future earnings profile, the share looks fairly valued.