In the near-term, Reliance Power will go up because what the management has cleverly done with this move is basically told people to go out and buy the stock because there is a near-term arbitrage opportunity. If we just look at the quantum of stock, which got sold in the first couple of days, I think 6-7 crore shares got marked for delivery in the first day after the listing.
So to that extent those people have booked their losses on day one, I don’t think this move will help them because I would be surprised if they can actually get record day for the bonus, which is with the retrospective effect that takes ones back to the 11th or on the listing day.
Whoever has booked losses after getting allotment they are pretty much in the red. I don’t think this move will help them at all. For people who have not sold or flipped yet, it helps because their cost comes down. In the near-term it will open an arbitrage opportunity as well, which is a reason why the stock will move up.
Because if you buy the stock around that Rs 380-400 level and depending on the ratio the better the ratio (the closer it is to 1:1), the more you will make once the bonus shares comes in account and the stock goes ex-bonus.
But my sense is the way it will play out is that people will look at this as a short-term kind of a created arbitrage and they will probably load on to the stock now, which will possibly take it back to the issue price. Beyond they will flip it once again, once the bonus share comes in, to lock in the profits.
Bonuses also work in terms of tax planning so there is an added carrot out there to play it, if you can actually use the bonus shares to create some losses in your book. So it will work. Technicals in the near-term have improved quite a bit with this bonus depending on the ratio which the market games. In the near-term the stock will see quite a bit of upside. There is no reason for somebody holding the stock to sell it now ahead of the declaration of the bonus.
They have improved their near-term technicals quite a bit on two scores; firstly it is with an eye on the fact that they have to raise a lot more capital going forward for this group with the kind of credibility that they might have had after this fiasco, they would not have being able to do it successfully.
PAGE_BREAK
Therefore they needed to do something to sort of conjure up some respectability. Secondly it’s an admission as people have said that they now believe that the issue was overpriced and the fair value of the issue is much lower - a process, which they are correcting. But sadly it not quickly enough for people who got allotment in the issue, they will feel extremely aggrieved.
In the medium-term once the stock goes ex-bonus, depending on the ratio whether it’s 1:4 or 1:1 that whole range. You will probably get an ex-bonus price of between Rs 350-375. At that price you need to revisit and ask the question on whether anything has changed fundamentally with this bonus or what improved for a two-month window is the technicals of the stock and arbitrage opportunity which was provided.
My sense is that you will find that once you look back ex-bonus you will discover that nothing has changed fundamentally. The stock will continue to remain fairly expensive at Rs 350-375 because near-term earnings are not going to happen for a very long time.
What this will improve? It will spread a little bit of feel good for people who have not switched out of the issue out yet. It will probably buy a little bit of respectability and credibility for which has being tarnished over the last couple of weeks. In the medium-term, I don’t think it will change a whole lot for people who were looking at the stock from a one-two year’s perspective.
Comments
0 comment