Reliance Power compensates with 3:5 Bonus issue to Public Share Holders

Our indices have traded in small compressed range, after opening in negative territory, taking global cues on thursday, and closed negative at the end of the session. Both the indices have closed below January monthly closings due to bear pressure, However, Nifty has held 5110 on closing basis, which is a crucial level to be watched during this week, where lots of information and events are scheduled which will bring in huge volatility on indices, due to F&O expiry, Railway Budget, Economic Survey and finally the Union Budget on 29.02.2008. Inflation has shown raise which is a cause of concern for regulators world over.However, US markets after opening negatively and trading in negative territory for most part of the session of trading, recovered and closed with good gains, due to last hour rally on expectation of rate cut and also that the bond insurers are likely to have a bail out.

 

Reliance Power management announced hefty bonus of 3:5 shares for all public share holders, excluding the promotores(ADAG group), diluting their stake in the company, increasing the public holding to 15%, for improving liquidity too, brings the cost of issue price to 269 fo retail investors is a positive measure which will enthuse investors today at the opening of the markets. March Nifty futures are trading at hefty discount of 50 points indicate shorts rollover and bear grip on the market and Singapore Nifty futrues trading at 70 point premium to friday closing and positive opening of asian markets indicate positive opening for our markets and short covering coupled with follow up buying if emerges, we might get huge rally upto budget.

 

Strategy for March: Buy 5100 Call and Put and leave it till expiry of the series for capturing the wild gyrations expected post budget presentation on 29.02.2008.

Roll overs to next month series begin - Volatility to increase

Our indices have very easily breached number of technical support levels, yesterday, just in one day's trading albeit on low volumes, out performed other asian peers on down side. The lack of follow up buying due to shattered sentiment from majority of the investors, any small selling is bringing the indices few hundred points even on nifty quickly. In this type of shallow market conditions, adventurous short sellers will be caught unaware when the tide turns against them. Roll overs to the next month series have already begun and shall continue. SBI and other leading PSUs started cutting PLR is good news for pushing the consumption, which is worrying the authorities, to sustain 8 to 9% growth of Indian Economy in this year too.

Technically, though markets have closed very weak, Nifty has held January closing 5137.45 on closing basis, where as Sensex closed shade below 17648.71; if held then the short covering from today on, due to roll over will take the indices past previous week closings by tomorrow which will give confidence to number of players might result in pre-budget rally from 25.02.2008. While the settlement of February series is on 28.02.2008, Union Budget for 2008-2009 will be presented at 11 a.m. by FM, which will set tone for the march series. If Nifty closes above 5650 by 29.02.2008 being the last day, it will confirm the january lows will not be re-tested as is being believed by most analysts.

US markets have closed positive after volatile trading, expecting 50 to 75 basis points cut in next Fed meeting in March, Asian markets opened positive and Singapore Nifty futures point to positive gap up opening, if Nifty trades above 5250 and close above it at the end of the session today, we will have continuation of rally tomorrow too.

Strategy for the Day: Buy 5200 Calls for intra day trading and book profit for quick returns.

Reliance Power Board meets on 24.03.2008 to issue Bonus shares!

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.

Disappointed listing of Reliance Power takes toll on Indian investor sentiment

11.02.2008 was historic day, when the largest IPO from ADAG "Reliance Power" which attracted record breaking subscription and interest was listed on indian bourses. As many feared, it traded below the issue price offered at 5% discount to retail investors, and all retail and HNIs have dumped the stock, to get out of the troubled boat, at the first instance, since many must have subscribed to the IPO with borrowed funds, where they had the double whammy of apart from capital loss, interest burden worsened the situation further.

 

Quite naturally, panic striken players of the bourses, sold everything whatever they can sell, which brought the indices to February lows, and the indices below 200DSMA too at the end of the session. The after effects continued on 12.02.2008 too, and markets turned very volatile, as the tug of war between bears and bulls continued to rest the 200DSMA as base line for gaining control of the markets in 2008. With Reliance Power touching 25% discount to issue price of 450 offered to general public, buying support emerged from long term fresh investors, as well as people who are stuck at higher levels in IPO, and indices staged smart recovery on Thursday, and inspite of petroleum price hike of Rs.2/- on petrol and Re.1/- Diesel, and weak global cues, our markets posted gains on the friday too, ending the 4 week negative closings.

 

In technical parlance, the lows made on January 2008, are held so far, and indices have recovered from sub 200DSMA levels to breach 20DSMA too at the end of week on friday, gives some comfort, but the time wise correction shall continue, giving rise to huge volatility for some more weeks, if not months. The mood of FIIs and DIIs shall decide the intraday, short term trend till 15.03.2008; and our markets shall price in the earnings forecast for 2009 from then onwards based on the advance tax payments by corporates, and also getting fair view on US economy and response from regulators all over the world.

 

Strategy for the Week: Buy blue chip stocks on any weakness in the markets to build long term portfolio.

 

Derivatives Strategy1: Buy a straddle of  5300 strike price of February Series, and hold till expiry.