The news that Reliance Power Board has decided to consider bonus shares in their meeting on 24.03.2008, gave some relief to Reliance Power shares which are trading at huge discount to issue price of Rs.430/450, ever since its listing on 11.02.2008. However, there was selling at Rs.430/- yesterday, from the trapped investors, and people who picked up at lower levels or averaged their cost of acquisition from 11.02.2008.
Generally, indian investors are always enthused with an announcement of 'bonus' news, and there will be prop up in the secondary market price, which happened with this company share price too.
The mute question is, what is the real value of Reliance Power? While there is no doubt on the capacity of the management ADAG to perform and deliver, what promised, evident from their past track record, the long gestation for generation of cash flows and profits does not warrant a buy at current price at all. Subscription in IPO generally is based on the interest generated in the market and players, which generally gives quick risk free returns to retail investors, who do not have much knowledge of the analysis of the fundamentals, market conditions etc.
This is one innovative measure being tried by ADAG as damage control, in view of the huge loss suffered by large investor clientele of all categories, and also as the group have many more ambitious plans to raise funds from markets/public, the sentiment needs to be taken care.
An academic question is generally the bonus shares are issued to all eligible share holders whose name appears as on the 'record date' which will be announced later and every share holder is eligible. Whereas the issue shall be a secondary market purchser of shares by 15.02.2008; around Rs.375/- or so and the IPO allottee at Rs.430/450 price are all treated on par, which is again not fair. If one has sold the shares allotted in IPO due to borrowed funds cost pressure at a loss already will be at further loss, as he might have never dreamt that this type of bonus will be on cards!
In our view, better exit the shares around 415-430 price, without bothering for the bonus shares, and stay in cash to pick the same at a lower price once it becomes ex-bonus; or switch to another existing performing company with good track record of dividends etc, as such stocks are available in plenty in the market, instead of waiting for 3 to 4 years from now on, for returns from the company to be delivered, as the cash flows and profits shall be visible only after 2011.
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