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Shareholders Get RIL Bonus Break

India’s biggest private sector player unveiled a windfall for shareholders

Reliance Industries, the largest private sector corporate in India by market capitalization, and, according to itself, controlling some 25 per cent of the world’s oil refining capacity, has announced the issue of bonus shares to the extent of 1:1 and thereby caught everyone by surprise. To up the happiness quotient of shareholders further, the company announced a dividend of Rs 13 a share, which is likely to add up to a total outgo of Rs 2,219 crore.

The bonus share as well as the dividend announced will also be credited to the shareholders of Reliance Petroleum, which had been amalgamated with RIL, effective April 1, 2008.

But, though it was definitely unexpected, it is a very welcome gift to shareholders, especially those who have held the stock from the medium- to the long-term. The last time RIL had done something of this nature was a dozen years ago in 1997. That this has come on the back of the sale of its own stock holding (treasury stock) of Rs 3,188 crore in September, at a share price of Rs 2,125, which was received very negatively by the investor community, added to the shock value. The stock sale had hit not just the sentiment on RIL scrip, it had also affected negatively the broader market as RIL is the biggest mover and shaker therein.

While attributing reasons can be a nebulous exercise here, it did encompass a wide variety of reasons, which together may have forced the act. Among them is that the company may well be looking to shake off any perception in the market that it had sold its treasury stock when share prices were ruling at a high because it did not expect them to rise too much further. In fact, the present exercise may go a long way in bolstering the perception that the company thinks its share is quite undervalued and has a long way to go up yet.

Another issue that the company may have wanted to dampen would be the ongoing spat between the Ambani brothers over the pricing of the gas at KG Basin. If the court ruling goes against RIL and it is forced to sell gas to Anil Ambani’s Reliance Natural Resources at less than the government price, then there is going to be a whiplash effect on revenues.

The company had recently gone through a huge capital expenditure exercise that involved the developing the gas rich KG D6 block (it has spent over $5 billion of the expected $9 billion expenditure) as well as the commissioning of the Jamnagar refinery. And since that is over, future growth is expected to be rosy on the back of the expected growth from KG production leaps as well as the jump in refinery capacity.

Also, with no uptick surprises expected on the quarterly revenues side, this move may well have been just to prepare as well as please shareholders.

On another front, the stock markets, Reliance Industries share price tumbled to Rs 2,099, a fall of 1.57 per cent on Wednesday, thereby recording the fourth straight day of losses – however, the announcement about the bonus and dividend was made after market hours. Over the last week, the stock had shed as much as 4.64 per cent of its value. It ended Thursday up by almost a per cent on the Bombay Stock Exchange.

The prolonged stock slump may be transitory, as Reliance history indicates that the company offers bonus shares only when it is quite confident of recording superlative growth in the future and that may well be promising for investors. Statistics show that the compounded returns by RIL from 1978 on has been at the rate of 25 per cent. In 2009, the RIL share has jumped as much as 70 per cent, but has been lagging the Sensex, which is at 74 per cent – albeit over the last two months, sometimes it is Sensex that is ahead other times it’s RIL.

But it remains to be seen how much of a revenue growth RIL records to be able to attractively service the-now much broader equity base that will double to 328 crore. At fiscal end 2008-09, RIL had a cash outflow of Rs 20,950 crore. Since the equity base will be larger, the outflow too will increase substantially.

RIL also restated its results for 2008-09 after factoring in the data of Reliance Petroleum, post-absorption. Consolidated net profit was stated at Rs 15,296 crore (a fall of 0.17%) on total sales of Rs 153,138 crore (up 10.6%). On a standalone basis the net profit was Rs 15,637 crore and net turnover was Rs 143,907 crore.

The present status of the company was summed up by Chief Financial officer, RIL, Alok Agarwal: “Production ramp-up is on track in KG D6 oil and gas fields and we have got financial flexibility to invest for the future. RIL has a strong balance sheet, large cash reserves and substantial financial flexibility due to its treasury stock holding.”

As far as mutual fund investors are concerned (in funds that hold RIL shares), there is not going to be any immediate benefits over and above mentioned earlier. Here are the funds that have substantial exposure to RIL shares: 

Top Fund Investors in RIL
Funds    Assets (%)    Assets (Rs cr)
ICICI Prudential Infrastructure   8.33   360.92
Reliance Natural Resources Retail   5.96   282.12
Magnum Taxgain   4.84   220.94
Magnum Contra   6.97   209.84
DSPBR T.I.G.E.R. Reg   5.29   185.18
Franklin India Bluechip   7.48   182.37
Reliance Equity Advantage Retail   8.60   160.98
Reliance Vision   4.29   159.10
HDFC Top 200   2.95   140.36
ICICI Prudential Dynamic   8.40   140.36
Reliance Growth   2.35   137.70
Reliance Tax Saver   6.83   130.33
Reliance Equity   5.28   122.64
Reliance Diversified Power Sector Retail   2.12   121.56
UTI Infrastructure   6.76   120.31
Morgan Stanley Growth   5.68   117.15
HSBC Equity   6.57   106.47
Tata Infrastructure   4.27   101.05
Unit Linked Insurance Plan '71   3.09   94.79
Franklin India Flexi Cap   3.85   87.23
Data as on August 31, 2009