Considered market friendly, but doesn’t change fundamentals.
In the last five weeks, four well-known companies – ITC, Bajaj Auto, TVS Motors and government-owned MMTC – have announced proposals to issue bonus shares to their shareholders. These moves exhibit a confidence on the part of the companies. Notably, a peep into the past suggests a reversal in trend, with calendar year 2010 (CY10) likely to end with more companies (see chart) issuing bonus shares as compared to last year on the back of rising profits and revenues.
So, is it time for investors to celebrate?
| OTHER KNOWN COMPANIES | |
| Company | Ratio |
| Cadila Health. | 1:02 |
| Castrol India | 1:01 |
| IVRCL Assets | 1:02 |
| Engineers India | 2:01 |
| Manap Gen Fin | 1:01 |
| Srinivasa Hatch | 1:01 |
| Orbit Corpn | 1:01 |
| Infotech Enterp | 1:01 |
| Kwality Dairy | 5:07 |
| Wipro | 2:03 |
| Sterlite Inds | 1:01 |
| Rallis India | 1:02 |
| Kansai Nerolac | 1:01 |
| Source: Capitaline, BS Research (Offers announced since April, 2010) | |
Higher liquidity, more visibility
When a bonus is approved by a company’s shareholders, shares are issued in proportion to the existing shareholding pattern. However, issue of bonus shares doesn’t indicate any change in the company’s fundamentals. It’s more of a sentiment indicator and partly aimed at improving affordability of the stock.
While Tridib Pathak, director (equities), IDFC Mutual Fund, also believes that issue of bonus shares does not mean a change in company fundamentals, he says: “It indicates more confidence (from the company's side) and higher visibility, in terms of growth.”
Read on to know the outlook for the four companies that have recently announced bonus share proposals:
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Bajaj Auto: The stock of Bajaj Auto has been up four per cent since July 14, when it announced it would consider a bonus issue after a gap of 13 years. The 1:1 bonus comes on the back of a strong set of June quarter numbers, wherein revenues jumped 68 per cent year-on-year to Rs 3,972 crore (driven by a 70 per cent jump in volumes to 928,000 vehicles), stable operating profit margins of 20 per cent despite rise in raw material costs and doubling of net profits (aided by investment income) to Rs 590 crore. Going ahead, while volumes are likely to be strong, profit growth might be lower as the base effect tapers off. At Rs 2,490, the stock is trading at 15 times its 2010-11 earnings. Buy on dips.
TVS Motors: The stock was up seven per cent on Wednesday when the company announced its 1:1 bonus and results. TVS, like its peers, is riding a strong demand wave that has helped improve volumes, revenues and profits. While volumes for the June quarter are up 33 per cent, revenues are up 38.5 per cent year-on-year to Rs 1,369 crore. New launches (Wego and Jive) helped improve realisations in the quarter by six per cent. Net profits more than doubled to Rs 40 crore. The company expects to touch two million units in sales for the current fiscal. At Rs 133, the stock is at 15.8 times its 2010-11 estimated EPS. Buy on dips.
ITC: The stock touched its 52-week high on Friday after the announcement of a 1:1 bonus, its seventh in the last three decades. ITC announced the bonus as it is completing 100 years of operations in the country in August this year. For the June quarter, ITC’s net profits moved up by over a fifth to Rs 1,070 crore, while turnover was up 16 per cent to Rs 4,817 crore, driven by growth across its business segments. Its cigarette business, which contributes over 50 per cent to revenues, grew 12 per cent to Rs 2,284 crore. While high raw material costs pushed up total expenditure by 14 per cent, ITC managed to hang on to operating margins. At Rs 298, the stock is trading at 18 times its 2011-12 earnings estimates. Buy on dips with a two-year perspective.
MMTC: India’s largest trading company with a turnover of Rs 45,124 crore in 2009-10 derives a large chunk of its revenues from iron ore exports and gold imports. High contribution from trading has meant wafer-thin operating profit margins (ranging 0.7-3.0 per cent) in the last ten years. Its global trade network, a near 50 per cent stake in the 1.1-million-tonne (mt) steel plant (including power plant, and access to large iron ore reserves) and allotment of a coal mine (estimated reserves of 700 mt) are among key tangible assets. The recent announcement of a stock split (10:1) and a bonus offer (1:1) is largely aimed at enhancing the stock’s affordability and liquidity. At Rs 29,924, the stock is expensive (PE of 690 times its 2009-10 earnings per share) say analysts. They believe valuations will come down once liquidity improves post the planned divestment.