DSIJ Mindshare

Special Report: BONUS OF ANOTHER KIND

The equity market over the last one year has yielded tremendous returns to investors and it now seems that all the low hanging fruits have already been picked. As such, investors are now in search of new themes and avenues to grow their investments. Corporate actions remain one of the most sought after indication by the investor fraternity to gauge the future performance of the shares. Many empirical studies suggest that the markets react positively to most of the corporate action news. For example, recently when Infosys announced that they were going to issue bonus shares, its scrip reacted positively and was up by 5.5 per cent on the same day while the BSE IT index went up by a mere 1.8 per cent.

In fact there are many other ways in which shareholders are rewarded by the companies. Some of the prominent corporate actions are:

• Dividends (regular and special)

• Rights issue (issue of shares to existing shareholders at a price lower than the prevailing market price)

• Bonus issue (issue of shares to existing shareholders without consideration)

• Stock split (division of face value with capital base remaining the same)

• Capital appreciation (in normal course).

Of these, dividends and rights issue have a direct bearing on an investor’s cash flows; while there is a cash inflow in the former case there is cash outflow in the latter. Though bonus issue and stock splits are non-cash events, in general the capital appreciation seen in these stocks in the near to short term is better than the market. However, on the flip side, in certain cases the return has been in the negative territory due to some adverse events pertaining to the respective companies or the sectors in which they operate. In both the corporate actions, the market price of the stock gets adjusted based on the ratio of bonus or stock split.

Bonus Issue

This is an issue of shares to existing shareholders without any consideration. With bonus issue the number of shares increases but it does not alter the value of the company as the prices gets adjusted accordingly. Also, a bonus issue is a way of capitalising free reserves into capital whereby shareholders receives additional shares in the company based on their respective holding and the holding remains the same even after the bonus issue. In general, bonus shares are given if there is adequate free reserve available with the company.

By doing so the company distributes its accumulated profits without any cash outflow. However, there are other factors which are taken into consideration before announcing a bonus issue. One such factor is the sustainability of the company’s financial performance over a longer period of time as earnings get diluted due to an increase in the number of shares and also for the fact that the company will need to maintain its dividend distribution policy which will increase due to a higher capital base.

Reasons and Impact

There are various reasons why some companies go for a bonus issue, which may be financial or otherwise. Many a times, a bonus issue is to celebrate a special event such as the silver, golden, diamond or platinum jubilee year of the company. Nonetheless, such an event should be backed by strong financial performance on a continuous basis in the recent few years. Increasing the liquidity of shares also remains one of the factors for issuing bonus issues. Sometimes the share price of a company appreciates to an extent that makes it difficult for retail investors to participate and therefore it may opt for a bonus issue to make it more affordable. This also remains one of the most tax-efficient ways of rewarding shareholders as it does not entail any tax implication to the company as well as to the shareholders.

Events in a Bonus Issue

• Record Date: When a bonus issue is announced, the company also announces a book closure date. Only those who are shareholders at the end of book closure date are entitled to receive bonus shares as no transfers are entertained on the book closure date.

• Ex Date: It is the date after the record date on which the share price gets adjusted based on the bonus ratio.

BONUS ISSUE CANDIDATES

Aditya Birla Nuvo

Restructuring it Right

ABIRLANUVO | BSE CODE: 500303 | FV Rs.10 | CMP: Rs.1704

Aditya Birla Nuvo (ABNL), a part of the Aditya Birla Group, has transformed itself from a manufacturing company to a diversified conglomerate. It has been carved out of a restructuring exercise done a decade ago by the group wherein IndoGulf Fertilisers and Birla Global Finance were merged into Indian Rayon. ABNL’s focus is to be in a leadership position of the businesses in which it operates and create value for its shareholders. Currently it is engaged in financial services, telecom, fashion, lifestyle products, and manufacturing businesses. The company has shown robust revenue and earnings’ growth despite difficult times of economic slowdown over the past several years.

It has also strengthened its balance-sheet as a result of continuous improvement in its financial performance. ABNL’s consolidated revenues, EBITDA and PAT grew by 11 per cent, 31 per cent and 65 per cent respectively between FY10-14. ABNL’s consolidated reserves stand at Rs 11,059 crore which is 85x its equity capital base of Rs 130 crore. Almost after a decade, the Aditya Birla Group has once again undertaken a restructuring exercise in ABNL wherein the carbon black business has been hived off to the group’s international carbon black entity and the IT and ITES businesses have been sold off to private equity players.

We believe that more activity on such front might be in the pipeline, such as creating a mega retail listed entity with Madura Garments (a division of ABNL) and Aditya Birla Retail (currently a privately held entity of the Aditya Birla Group) getting merged into Pantaloon Fashion & Lifestyle (a listed entity and a subsidiary of ABNL), rechristened as Aditya Birla Retail.

To sum up, we believe that since the economic growth outlook seems to be on an uptrend, ABNL is poised to capture these growth opportunities across its various businesses and report higher profitability both on account of increased revenue and improved margins. Also, the company is inching towards its 60 years of existence (incorporated in 1956) and hence might reward shareholders accordingly.

ITC

Profitable Diversifications

ITC | BSE CODE: 500875 | FV Rs.1 | CMP: Rs.354

ITC is a large diversified conglomerate and is India’s one of the most admired and valuable companies. It has interest in businesses like FMCG, hotels, paperboards, paper & packaging, agri products, and information technology. Retaining its leadership position in tobacco (FMCG space), ITC has created multiple growth drivers by expanding in other businesses and attaining a leadership position by growing them in scale and size. ITC has also created several brands in different segments and has huge penetration, resulting in a strong financial performance. With its foray into new segments, the revenue contribution from its cigarette business has gradually reduced to less than 50 per cent whereas the EBITDA contribution is still in excess of 75 per cent. Once the new business starts inching towards maturity, the contribution of its cigarette business in EBITDA is expected to reduce accordingly.

ITC has reported strong CAGR of 20 per cent / 22 per cent and 28 per cent in consolidated revenue/EBITDA/PAT during FY10-14. ITC has a superior margin profile and return ratios which are continuously on a rising trend (see table). ITC being a debt-free company and backed by strong financial performance has a healthy balance-sheet with reserves of Rs 25,467 crore being at 32x its equity capital base of Rs 795 crore during FY14.

The company has a trend of rewarding its shareholders through bonus issues. During 2005 it announced stock split (10:1) and bonus (1:2); again in 2010 it announced a bonus (1:1), and this has helped in enhancing liquidity in the stock. We believe that this year too ITC may announce a bonus as there has been a gap of five years from its last such announcement.

Mahindra and Mahindra

Driving on the Right Path

M&M | BSE CODE: 500520 | FV Rs.5 | CMP: Rs.1225

Mahindra and Mahindra (M&M), a flagship company of the Mahindra Group, has emerged as a leading player in the farm equipment and utility vehicles’ segment. With its recent acquisition of Ssangyong Motor Company it has marked its foray in the international SUV market too. The company's net profit in the past six years has grown at a compounded annual growth rate (CAGR) of 25 per cent to Rs 4,450 crore in FY14 while its net sales have grown at a CAGR of 25 per cent to Rs 74,000 crore in the same period. However in the first half of FY15 the company posted a flat result on a consolidated basis. Even M&M’s volumes are likely to remain under pressure in the second half of FY15 given the weakness in both the automotive (due to lack of products in the compact UV space and due to subdued LCV sales) and the farm equipment space (due to poor sentiments on back of lower sowing).

The interest rates will fall from Q1 FY16, which might be a positive trigger in the automotive segment. M&M aims to introduce two new utility vehicles in FY16 in the compact space. Further, other automotive segments i.e. LCV and three-wheelers are likely to witness recovery in FY16 on the back of improvement in the economy. We also believe that the tractor industry’s growth would revive in FY16 on the back of increased non-agri usage of tractors and higher MSPs.

We have seen a sharp increase in the market value of key subsidiaries over a five-year period, which has helped to boost overall valuations. The return on cash invested by M&M in its subsidiaries has been exceptionally high. The company has a capital base of Rs 295.2 crore as against reserves of Rs 24,767.5 crore which is 84 times the paid-up capital. The company had issued a bonus in FY06. During FY16 the company will celebrate its 70th year of incorporation. Therefore, considering the above factors, M&M may issue a bonus in FY16.

TCS

Creating Global Value

TCS | BSE CODE: 532540 | FV Rs.1 | CMP: Rs.2417

Tata Consultancy Services (TCS) is a leading global IT services company operating across the globe. It offers a full array of capabilities that its customers require for pursuing growth opportunities and facing business challenges. Over the years, TCS has been demonstrating agility and adaptability in providing innovative customer-specific solutions, powered by best-in-class processes and engaged workforce. The hallmarks of the company’s success story are disciplined execution of projects and customer-centricity.

TCS offers various IT solutions including a consulting-led, integrated portfolio of IT, BPS, infrastructure, engineering, and assurance services. This is delivered through its unique Global Network Delivery Model, recognised as the benchmark of excellence in software development. TCS is a part of the Tata Group, India’s largest industrial conglomerate and has over 3,00,000 of the world’s best-trained consultants in 46 countries.

Over past few years, TCS has been consistently posted good financial performance. The company has registered a phenomenal growth in its revenue, exhibiting 28.47 per cent CAGR and 28.51 per cent average growth since FY10. Interestingly, the company has been taking the lead in maintaining or rather increasing both EBITDA and PAT margins to 29.88 and 24.22 per cent over the last four years respectively. Furthermore, the company’s EPS too has shown 28.64 CAGR since FY10.

The company’s performance over the last decade is testimony to the story of TCS creating its own high standard of value creation. While relentlessly pursuing financial excellence, TCS has generated significant wealth for all its stakeholders. The wealth so created has been judiciously allocated to stakeholders during the decade of its existence as a listed company. There have been a couple of instances where the company has issued bonus shares to its shareholders as in 2006 and 2009.

Considering its financial performance since FY10, TCS’ management may think of rewarding its shareholders by issuing bonus shares in the next one year.

VA Tech Wabag

Clean and Healthy

VA TECH WABAG | BSE CODE: 533269 | FV Rs.2 | CMP: Rs.1540

VA Tech Wabag is well-positioned to capitalise on its multi-year secular growth in the domestic and global water treatment industry due to a trend of increasing urbanisation and industrialisation increasing the stress on demand for fresh water. This would also necessitate significant investment in wastewater management by local municipal bodies and investment in water treatment is likely to increase multi-fold globally. Accordingly, Wabag is expected to benefit significantly by leveraging its strong domestic presence and rising global footprint.

VA Tech Wabag’s strategy of asset-light growth, coupled with high ROCE and net cash balance-sheet, make it an attractive player in the mid-cap industrial space in India. The company’s net profit in the past five years has grown at a CAGR of 25 per cent to Rs 113 crore in FY14 while its net sales have grown at a CAGR of 16 per cent to Rs 2,230 crore in the same period. The company has a small capital base of Rs 5.36 crore as against reserves of Rs 855 crore which is 160 times the paid-up capital. During FY15 the company celebrated its 20th year of incorporation. Therefore, considering the above factors, VA Tech Wabag is a strong candidate for issuing a bonus in the near future.

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