No consensus on Rel Power buy

May 29, 2008
Ashish Rukhaiyar
MUMBAI

IS this the right time to buy Reliance Power shares? Or should one wait for it to go ex-bonus? Retail investors seem to be in a fix as there have been conflicting views in the market over the “right” value of the shares. Reliance Power shares are currently trading at Rs 411.20 and has been under pressure over the last one week, shedding 7%.

Dealers tracking the counter say that retail investors have been selling shares of the Anil Ambani-controlled power utility, and hoping to buy it cheaper after it goes ex-bonus. Investors do not see any reason for holding onto the shares until June 2 (record date) to be eligible for the bonus shares that will be doled out to public shareholders in the ratio of 3:5 (three for every five held), they say. Because the difference between the total cost of five shares at the prevailing market price and that of eight shares at the likely ex-bonus price is insignificant.

Market experts who advise against holding Reliance Power shares have their maths ready. According to back-of-the-envelope calculations, the stock should be available at less than Rs 260 (Rs 257 to be precise) after going ex-bonus. This, they say, is after factoring in the 22.80 crore existing non-promoter shares and the 13.68 crore new shares that will make its way to the market.

Assuming that the shares list at Rs 260, an investor will have to shell out around Rs 2,080 for eight shares. At the current market price, five Reliance Power shares will cost him Rs 2,056 — these five shares will entitle him for three more shares. Not much of a difference. One can square off his position, buy other stocks and then buy back RPower after it goes ex-bonus.

In other words, there is no need to lock up capital in one stock. However, there are many who do not subscribe to this theory. Their biggest argument is that stock markets, and for that matter stock prices, rarely behave in the manner in which they are expected to.

Theory is miles away from practical, they add. They feel that the stock will zoom after going ex-bonus; their gut feeling is that the stock could rise to around Rs 280 ex-bonus.