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ITC bonus issue to lower cash reserves

ITC bonus issue to lower cash reserves
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First Published: Sun, Jun 20 2010. 11 54 PM IST

Updated: Sun, Jun 20 2010. 11 54 PM IST
ITC Ltd’s shareholders will get one share for every existing share by way of a bonus issue. The last time they got a similar ratio was in 1994, with the previous bonus issue giving them one share for every two held. Financially speaking, a bonus does not make any difference, because the company’s net worth (equity capital plus free reserves) remains the same. In ITC’s case, an amount equivalent to the bonus will be transferred from reserves to equity capital.
Still, bonus issues in India generate a lot of excitement, chiefly among retail investors who like the sound of free shares falling into their demat account. There is also a belief that companies typically issue bonus shares when they are optimistic about their future. Some, of course, also issue shares to lift shareholders’ spirits. But there is one thing that is real about bonus shares; if the company maintains its dividend ratio, the payout shoots up.
Also See Added Bonus (Graphic)
In ITC’s case, it would double. And this would be on the back of a step-up in ITC’s dividend payout in fiscal 2010. It will pay Rs4.50 a share, or 22% more than the previous year, an outflow of around Rs1,700 crore. It is also paying a special dividend of Rs5.50 a share, or an additional Rs2,100 crore. While the special dividend would be a one-time payout, if it keeps the dividend constant at Rs4.50, after the bonus issue, its dividend payout will double to Rs3,500 crore. And, this does not include dividend distribution tax. Whether ITC keeps its dividend constant or not only time will tell, but shareholders will surely expect it to do so.
ITC can afford to pay out more as a dividend for several reasons. For starters, it generates a lot of cash, for which it has no big capital expenditure plans lined up. In fiscal 2010, its cash flows from operations were up 40% to Rs6,620 crore. It has already made significant investments in the capital-intensive portion of its business portfolio—paper and hotels. The paper division is doing quite well and an improving economic environment should see it do well. The hotels business went through a bad phase in 2010, but the worst is behind it. Its flagship cigarettes business continues to do well, generating profits and cash.
What’s more, its non-cigarette consumer business, too, has seen performance improve, with revenue rising and losses declining. This business also saw its capital employed fall by 18%, a sign that it is becoming more self-sufficient. The bonus issue, thus, will give ITC a way of getting rid of that extra cash it generates, which will allow it to preserve or even improve important ratios such as return on capital employed, which measures how much the company earned on its invested capital.
Graphic by Ahmed Raza Khan/Mint
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First Published: Sun, Jun 20 2010. 11 54 PM IST