After 8-year wait, Reliance Industries gives Street a reason to cheer

MUMBAI: The annual shareholder meetings of Reliance Industries under founder Dhirubhai Ambani were nothing short of gala fests. Ambani doled out rich dividends, rights and bonus shares issues during these events triggering cheers and celebrations from investors. The annual general meetings (AGMs) under son Mukesh Ambani, however, have been relatively modest affairs, but on Friday some shareholders were reminded of the good old times.

A bonus share issue — the first after eight years — and introduction of a Jio phone sent its shares soaring by 3.8% to Rs 1,586.20 on Friday — the second highest closing for the stock. Sentiment was also boosted by better-than-expected first quarter results announced the previous day.


Market participants said the 1:1 bonus share issue has sent out a positive signal to investors. “The bonus share issue is significant at a time when the capital expenditure on the core businesses is bottoming out,” said Raamdeo Agrawal, cofounder, Motilal Oswal Financial Services. “Maybe the company is confident of good earnings coming through from its core businesses. Overall the management could be signalling that the company will be entering the next leg of its growth.” So, the 24 lakh shareholders of Reliance Industries will get one free share for every one they hold. Theoretically, the number of shares double, but the stock price halves too adjusting for the expanded share capital.


Still, the mood among shareholders after the bonus announcement was jubilant. Most shareholders were expecting bonus share issue since the company has completed 40 years since IPO. Even in the AGM a year ago, most shareholders had said that they expect a bonus issue next year.


Ambani made announcements on Jio which were received by loud cheers, claps and blowing of trumpets. Then, he presented an audiovisual presentation on Dhirubhai Ambani and after that he told shareholders that while they watched the video, the board has approved issue of bonus shares for shareholders. This received the loudest cheer from shareholders.

“The bonus announcement will definitely bring back the investor confidence on the company and shows management re-assurance about the future growth perspective,” said KR Choksey, leading broker.

Reliance shares are just 2.5% from its lifetime high level of Rs 1,626.05 hit on January 15, 2008. The announcement to launch Jio phones dented shares of other telecom companies such as Bharti Airtel, Idea and Reliance Communications, which fell 1-3%.

Historically, euphoria surrounding bonus share announcements has been shortlived.

When Reliance Industries announced a 1:1 bonus issue on October 7, 2009, it was touted as a Diwali gift for shareholders. But the stock market was not impressed, and after an initial spurt, the Reliance Industries scrip slipped more than 5% within 3 months of the announcement. Similar was the case in 1997. Stock fell 5.4% in the three months post bonus announcement on 26 June 1997.

Analysts said the bonus share issue has lost its relevance compared to previous times. The issuance of bonus shares is merely an accounting exercise that shifts money from one head to another. The company uses its accumulated reserves to issue new shares to existing shareholders and expand its equity capital.

“Bonus issue does not have much credence as before. Unlike dividend, funds for bonus issue go out of reserves,” said Sanjiv Bhasin, executive VP, markets and corporate affairs, at IIFL. Bhasin said Reliance Industries will remain an overweight for institutions. But, for retail investors, buying at Rs 1,600 doesn’t leave much upside, he said. “Post bonus issue, equity will bloat up to Rs 6,000 crore. GRMs and petchem margins look unsustainable. Also, capex expansion is baked in the price, so the stock doesn’t have much upside,” added Bhasin.

S P Tulsian, promoter, Premium Investments said, “The perception around bonus issues is that it is usually given to level the price of shares that have risen quite high. That being said, the investors may feel rewarded by this issue. On the results front the refinery and petchem businesses look poised to scale the next phase of growth.”