Assuming market perception of Reliance Power Ltd’s firm value hasn’t changed from the pre-bonus announcement levels of Rs86,897 crore, the company’s shares could jump as much as 39% on Monday from last week’s close of Rs417.
What the 3:5 selective bonus issue essentially means is that non-promoter or minority shareholding would increase from 10.09% to 15.22%. Their stake is now worth Rs13,226 crore and since the shares trading in the market currently are cum-bonus, each share would be worth Rs580 (minority shares stand at 228 million). As a result, retail investors who have held on to their share will gain about 35%, while other investors will gain 29%.
High net-worth investors who borrowed funds to buy shares in the initial public offering would manage to break even since their cost of acquisition was about Rs560 per share. But most of them tend to book losses on listing.
While arbitrageurs will rush in to bridge the gap between Friday’s close and the sudden change in the cum-bonus share value, they would also be mindful of the short-term capital gains tax of 10%, due to which Reliance Power shares may trade slightly lower. Once the bonus issue becomes effective, 136.8 million new shares will be issued to minority shareholders, which means the ex-bonus share price should be around Rs362.
As pointed out right at the outset, these calculations depend on the assumption that Reliance Power deserves a value of Rs86,897 crore, the level it traded at before the bonus issue was mooted. This may not necessarily be the case, especially after reports late last week that the government of Haryana has imposed damages on Reliance Energy Ltd for its failure to meet a deadline for a 600MW thermal power plant. Reliance Power, which is involved in larger projects, gets a large part of its value because of assumptions of timely execution.
Leave alone penalties from authorities, if projects are not completed on time, estimates of cash flow will go awry and firm value will deteriorate. Those waiting to jump in and gain from the lucrative bonus issue should be mindful of this risk.
Reliance Energy shareholders, too, have some reason for cheer. It was first assumed that its stake would reduce owing to the bonus issue to only minority shareholders, but it now turns out that its stake will be maintained at 44.96%. In that case, the 9% erosion in its value last week seems overdone, and its shares should also rebound, unless reports about the penalty in Haryana continue to weigh down valuations.
While public shareholders in Reliance Power have reason to rejoice because of the liberal bonus issue, the attached table shows that it hardly cost promoters anything. Anil Ambani’s investment in the firm has been all of Rs1,720 crore. Even after the dilution in his stake owing to the selective bonus issue, his shares are still worth Rs34,600 crore.
Plenty of scope for sweating CBoP assets
HDFC Bank Ltd’s 754 branches supported, as on 31 December 2007, deposits of Rs99,387 crore and net advances of Rs71,387 crore. On the other hand, Centurion Bank of Punjab Ltd (CBoP) had net advances of Rs15,083 crore and deposits of Rs20,710 crore from a network of 394 branches.
Put another way, the average deposit per branch for HDFC Bank was Rs131.8 crore and average advance per branch was Rs94.7 crore. In sharp contrast, CBoP’s deposits per branch was just Rs52.6 crore, while net advances per branch was Rs38.3 crore. This means two things: one, HDFC Bank is far more efficient than CBoP, (which is partly because CBoP hasn’t yet had the time to bring the Lord Krishna Bank branches up to scratch), and two, HDFC Bank should be able to squeeze plenty of efficiencies out of the CBoP branches. While HDFC Bank’s balance sheet size would increase by around one-fifth as a result of the merger, its number of branches would go up by half.
Net profits per branch for the December quarter work out to Rs0.56 crore for HDFC Bank compared with Rs0.12 crore for CBoP. Note that while CBoP’s advances were 21.1% of HDFC Bank’s, its net profits were much lower, at 11.2%. That’s because net interest margin was 4.3% for HDFC Bank, compared with CBoP’s 3.6%. HDFC Bank’s low-cost Casa (current and savings accounts) deposits, at 50.9% of total deposits, are much higher than CBoP’s 24.5%. And finally, of course, HDFC Bank’s non-performing assets at 0.4% of net customer assets are much less than CBoP’s 1.69%.
Nor is HDFC running out of steam as far as organic growth is concerned. Net advances growth was up 48.7% year-on-year in the December quarter, while growth in net profits was 45.2%. CBoP’s advances growth was 60% (this was after including the Lord Krishna Bank takeover) while net profits grew 44%.
What should be the swap ratio? Current market prices indicate it should be in the region of 26:1 or 26 CBoP shares for 1 share of HDFC Bank. If book value per share estimates for fiscal 2008 are taken, the ratio should be around 28:1. In view of CBoP’s comparatively weaker financials, in particular its deteriorating asset quality, the swap ratio should be tilted in favour of HDFC Bank.
HDFC Bank has always commanded a substantial premium on account of its steady profit growth and its excellent management. Combining that with a large network that would enable it to leap ahead of ICICI Bank Ltd in terms of branches should help it buttress that premium. Of course, everything depends on the price it pays for that growth.
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