Category Archive : Stock Market Concepts

What is Stock Split?

What is Stock Split?

Significance of Stock Split

Introduction

A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Let us discuss what is stock split, why it is done, what are the impacts and the significance of stock split from company’s as well as investors’ perspective etc.

What is Stock Split?

  • All the public companies that are listed on stock exchanges have a definite number of outstanding shares available for trading.
  • A stock split is a decision taken by the board of directors of a company to divide its existing shares into multiple shares. In simple words, The process of dividing the outstanding shares into further smaller shares is known as stock splits.
  • In this the market value of the total outstanding shares of a company remains the same but market value of a single share is reduced in proportion to the no of shares extracted out of a single share.
  • Thus, although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.
  • The most common forward split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares for every share held earlier.
  • Reverse stock splits are the opposite transaction, where a company divides, instead of multiplies, the number of shares that stockholders own, raising the market price accordingly.
  • People often confuse bonus shares with stock split. Distribution of bonus shares only changes its issued share capital whereas stock split splits the company’s authorized share capital
What is Stock Split?
What is Stock Split?

Example of Stock Split

Example 1
  • To explain stock split further, consider the example of Stock split done by SBI in November 21, 2014.
  • Share price of State Bank of India closed at Rs 2920.9 on November 20, 2014 and on the next day (November 21, 2014) it closed at Rs 297 after the stock split as it announced a stock split of 10:1.
  • The only main reason that stock splits are done is to attract new investors and increase liquidity of the shares in the market. Value of the company does not change at all.
Example 2
  • To explain this, consider one more simple example continuing the previous example. Assume that there are two investors Harish and Aman. Both wanted to make an investment of Rs 300,000 in SBI.
  • Harish bought the shares on Wednesday which was the last day before the split date. Harish ended up buying around 103 shares at a price of Rs 2,900 per share, with Rs 1300 left from his available funds of Rs 300,000.
  • Second investor Aman thought he was smarter and waited for the stock to split and bought it on Thursday. For the same amount of Rs 300,000, he could buy 1034 shares at Rs 290 per share and is left with only Rs 140 left with him out of the total fund of Rs 3 lacs. In this way, stock split gives enormous liquidity, especially for retail investors.
  • But by the end of the week when Harish checked his Demat account, it would show that he holds 1030 shares of SBI rather than the 103 he bought, but his holding value will be the same as earlier. This is because of the fact that shares of all the shareholders would be split in the same ratio without impacting the value of holding, irrespective of the date of purchase.

Why Do Companies Split stocks?

  • A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. That is the company finds that the liquidity of its stock in the market is very less due to high value of its stock.
  • The primary motive for stock split is to make the stock more affordable for the small retail investors. It, thereby increases the investor base. This results in a renewal of investor interest of the company which has a positive effect on the share price in the short term.
  •  A retail investor generally doesn’t not prefer trading in a highly valued stock and lowering the stock value helps increasing the stock liquidity.  This has the practical effect of increasing liquidity in the stock. However, the underlying value of the company does not change.
  • Stock Split is done to enhance the liquidity in the market as the number of shares is increased. High liquidity results in an efficient market with the low bid-ask spread.

We have many companies trading at very high prices. Consider Eicher motors trading at Rs 20015, MRF trading at Rs 54628 or Bosch India at 16948 (as on 13.06.2019). So, let us also try to understand why many companies don’t go for stock-split even when their shares are trading at very prices. Main reasons behind this are:

  1. Institutions play a major role nowadays and for them it doesn’t really matter if they are buying a share at Rs 250 or Rs 25000.
  2. When a stock price is really low, it invites a lot of day-traders, increasing the volatility. When the share price is kept high, there is a slightly less volatility from high frequency trading.
  3. It increases buying and selling cost, because of spread. (Spread means difference between buying quote and selling quote) because higher valued stock have lower spread. Today you will find in Bosch Buying quote of Rs. 25000 and selling quote of Rs. 25003 but you won’t find any company’s quote for buying Rs. 250 and Rs. 250.03 for selling because minimum tick size is 5 paise. 
  4. Sometimes management thinks that stock split doesn’t make any difference to company’s performance or company’s valuation.
  5.  It is bit of attitude issue too. If a company split its share by 10:1 than stock prices will come from say Rs 2500 to around Rs.250, but that makes it an ordinary company in the eyes of a lay man. Today Bosch / MRF get difference respect due to their share prices. Also, notice that in 90’s Cipla’s share prices were higher than Bosch but it gave huge bonus and stock split. Today, people don’t see Cipla something very different from Ranbaxy / Sun Pharma / Lupin / Wochard of the world. 

Impact of Stock Split

Stock splits are generally done in bull markets, as many shareholders will want to retain the wealth and even see an increase in the share price, mainly caused by increased liquidity and demand of the stock.

  1. Share Price : When a stock splits, it can also result in a share price increase following a decrease immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices. Another reason for the price increase is that a stock split provides a signal to the market that the company’s share price has been increasing and people assume this growth will continue in the future, and again, lift demand and prices.
  2. Market Capitalisation : Fundamentally speaking, value of the company or market capitalisation of the company does not change after a stock split.
  3. Earnings per Share : Financial ratios get adjusted according to the number of outstanding shares. So, if a stock had an earnings per share (EPS) of Rs 90 before announcing a 10:1 split, the new EPS for the company will be adjusted to Rs 9.
  4. Dividend per Share : Dividend for every share (dps) will also reduce proportionately after stock split. But things in the vibrant stock market can be different.

Significance of Stock Split for Company & Investors

For Company :
  1. In case of forward stock splits, the number of shares increases hence the ownership base of the company increases. The shares can now be owned by a wide range of investors.
  2. Liquidity of the stock increases, thereby increasing the market efficiency of the stock.
  3. There is no change in Authorised and Issued capital of the company as it remains the same.
  4. In case of reverse share splits, the company can sideline penny stock traders as the price of the share increases.
For Investors :
  1. In case of forward splits, shares are now more affordable to investors. Those who are already invested does not benefit apart from an increase in a number of shares, however since the price of share also decreases, the overall value for them remains same.
  2. Future Earning per share (EPS) may reduce as numbers of shares are increasing. However, for existing investor, there may not be any impact as his existing numbers of shares are also increasing.
  3. For a Share split of a blue-chip company, there is a positive perception about further growth of the stock price to pre-split levels during the growth phase of the company.
  4. Share splits are tax neutral. There is no flow of money during share splits hence there are no tax implications due to this.
  5. In case of reverse stock splits, investors need to judge the reason for the same and if the same is for avoiding delisting of stock from the exchange, it may be perceived as negative.

What Should the Investors Do?

  • We advise investors to not just go and buy the stocks going for split. While a split makes the stock more affordable for investors, they should also look at the company’s fundamentals before putting in their hard earned money in the stock. They must carefully look at a proportionate growth in the bottom line (Profit After Tax) of the company before investing in such stocks. 
  • “What really creates wealth for the shareholders is not bonuses and splits. A split or bonus with a consistent growth in the bottom line is what investors should look at before investing in such counters.
What is Bonus Share?

What is Bonus Share?

Benefits of Bonus Share Issue

Introduction

Bonus share Issue is a way of distributing the corporate’s earning to the shareholders, not given out in the form of dividends but converted into free shares.

What is Bonus Share?

What is Bonus Share?
Bonus Share : Meaning & Benefits
  • Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.
  • The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding.
  • For instance, if Investor A holds 100 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 400 shares for free and his total holding will increase to 500 shares.
  • Notice that Whenever a bonus issue is announced, the company also announces a record date for the issue. Record date is the date on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.

How bonus shares are issued?

  • Bonus shares are generally issued by using the free reserves of the company. Every year, companies retain some part of their earnings and give the remaining part to shareholders in the form of dividends, as the most common way.
  • Companies accumulate these retained earnings over time. So, with the bonus issue, these reserves will be converted into the capital. If we take a closer look at the balance sheet, we observe that capital is simply being transferred from the retained earning account to paid up capital account.
  • Hence, the overall shareholder’s equity remains same. So, when bonus shares are issued, bonus prices will adjust according to the bonus ratio keeping the total market capitalization of the company same.
  • So, if a bonus issue of 1:1 is announced, share price will half and no. of shares with the shareholders will double

Impacts of Bonus Share Issue

  • In most of the cases, the stock price of a company rises after a bonus issue. While analyzing the effect of bonus issue on the share price of the company in two stages.
    • Share price movement from the time the issue is announced till the record date
    • Share price movement one year after the record date
  • It can be seen that there is a positive trend in the share price movement of the company post bonus issue announcement till the record date and even one year after the bonus issue date.
  • After the bonus issue, the share price of the company gets adjusted as per the bonus ratio i.e. the total market value of the company remains same. To understand this, consider one example. Suppose the stock price of a company before bonus is Rs 200 and a company issues bonus shares in the ratio of 1:1, the post-bonus share price will be Rs 100 and the total market value (2 x Rs 100=Rs 200) remains the same.
  • Bonus share also increase liquidity. As in above example, after bonus share, stock price of the company will adjust as per the bonus ratio. So, stocks are available at a lower price now, thus increasing liquidity. It makes it easier to buy and sell.
  • After bonus share, the value of Earning per share or EPS will go down.
  • Earnings per share (EPS) = Net Profit / Number of shares
  • As the profits remain the same and the number of shares increases, the value of Earnings Per Share (EPS) will go down.
  • Since total numbers of shares are increased as a result of bonus issue, dividend per share may be less.

Benefits

A. From Company’s Perspective :
  1. By issuing bonus shares, companies can satisfy shareholders when they don’t have enough cash to pay dividends. They can then use the cash in their expansion or other planned projects.
  2. Issuing bonus shares means capitalisation of profits, which always increases the credit worthiness of the company. It also improves their credit rating which means they can borrow at a better rate.
  3. A bonus issue indicates that the company is booming and it is in a position to service its larger equity.
  4. Liquidity cash position of the company will remain unaltered with the issue of bonus shares because issue of bonus shares does not result into inflow or outflow of cash.
B. From Shareholders’ / Investors’ Perspective :
  1. Shareholders need not pay tax on the bonus shares. However, in the case of dividends, they need to pay tax. It is beneficial for those investors who believe in the long-term growth story of the company.
  2. If needed investors can sell some of the shares to meet their cash demands, thus increasing the flexibility for them.
  3. Shareholders will get additional shares as a result of bonus issue. So, the investors will get additional dividend as a result of additional shares.
  4. Issuance of bonus share leads to increase investor’s confidence in operations of the company. Post the bonus, the share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the shareholder. However, a bonus is perceived to be a strong signal given out by the company and the consequent demand push for the shares causes the price to move up.
  5. So, when stock prices move up in the long run, there will be a dramatic increase in the wealth of shareholder.
Comparison of Stocks Vs Bonds

7 Points Comparison of Stocks Vs Bonds

Stocks Vs Bonds : What Is The Difference?

In this article, we are going to do a comparison Stocks Vs Bonds and differentiate between them on the most fundamental level. There are two ways in which a company can raise capital, by borrowing money which is debt or by selling shares of itself or via equity.

A security is simply something that can be bought and sold and have a claim on something to have an economic value. So, a security in the equity market is a stock and a security in the debt market is a bond. Stocks and bonds are also the two main classes of assets which investors all over the world use in their portfolios. However, there are many types of stocks and bonds with varying level of volatility, risk and return, which leaves you with the most difficult job of selecting right financial assets in your portfolio. So, to construct a good portfolio that grows well over time, it is a very important need to clearly understand the differences between stocks and bonds as asset classes for investments.

Stocks Vs Bonds Comparison

Stocks Vs Bonds Comparison

Let see the difference based on the above mentioned points :

1. Meaning
  • Stocks are the equity instruments representing an ownership interest in a corporation and are traded on stock exchanges.
  • Bonds are the debt instruments with a promise to pay back the principal amount with interest at a specific date and are traded on bond exchanges.
2. Who Are the Issuers?
  • Stocks are issued by only companies who look to raise capital to use it for expansion projects and further grow the company or because the owner of the company wants a big lump sum of money for themselves as a reward for the hard work they have put in building the company.
  • Bonds are issued by government institutions, financial institutions and companies etc. to borrow large sums of money for expansion, acquisition or other use.
3. Working of Shares & Bonds
  • Here’s how shares work : Let’s consider a company who has made it through its start-up phase and has become quite successful. The owners of the company now wish to expand, but they are unable to do so on their own income that they earn through their operations. So, they can turn to the financial markets for additional financing. One way to do this is via stock market i.e. to split the company up into “shares,” and then sell these shares in the stock market through a process known as an “initial public offering,” or IPO. A person who buys Stock, is therefore buying an actual share of the company, which makes him or her a part owner – however small.
  • And here’s how bonds work : When companies need money to fund their expansion, issuing bonds is the second way to do it. For better understanding, consider a bond like a simple loan. The investor agrees to give a specific amount of money to the issuer and the issuer pays regular interest (coupon payments) on it. At maturity, the total amount (loan principal) is paid back to the investor. Many companies chose bonds and not bank loans because the coupon payment is often less than what they need to pay on loans. Also, there are many limitations in case of bank loans but bonds give you a lot of flexibility to use the raised capital.
4. Returns
  • Stocks pay dividends to the owners, but only if the corporation declares it. Profits earned by the company are paid in the form of Dividends to the shareholders of the comapny. When investors invest in stocks, they are more interested in the price growth potential of the stock/company ie. the capital appreciation in the stock price of the company.
  • Generally, the bond contract requires that a fixed interest payment be made every six months or every twelve months. Interest payments are made in the form of Coupon Payments.
5. Risks
  • Investing in stocks is much more riskier compared to bonds, as the returns are not guaranteed. Stock prices can fluctuate a lot over any time horizon and this volatility can decrease you share price to great levels. If you use leverage to invest in stocks, like buying on margin or short selling, you could even lose more than what you invest. So, for proper risk management, it is always recommended to hold a mix of stocks and bonds in the portfolio. Market risk, Business risk are the major risks associated with the stocks.
  • Bonds are considered to be very low risk investment type, but not completely risk free. The most common risk is interest rate risk. If the interest rates in the country starts increasing, the bond prices will start falling. Since bonds are generally long term investment, inflation risk is also there as with the inflation, the value of money will decrease with time. Bonds also involve market risk, as with the economic conditions worsening, it may be difficult for companies to make coupon payments or even the principal payment at maturity, in the worst case.
6. Additional Benefit

Shareholders get the right to vote, while Bondholders get the preference in terms of Repayment and also on liquidation.

7. Traded Over
  • Stock market has centralised place also called as stock exchanges, where stocks are bought and sold. Brokers do it on the behalf of buyers and sellers using a well-developed electronic system.
  • Similar to the Stocks, Bonds are also traded over the exchages/platforms like NSE, BSE etc In the primary bond market, the entity that needs to borrow money invites the general public or investment banks to purchase their bonds. In the secondary market, the investors who had purchased the bond previously, sell their bonds to other investors. Various brokers operate in the secondary market who facilitate these transactions.
Difference Between ROE & ROCE

7 Points Comparison on ROE Vs ROCE

Difference Between Return on Equity & Return on Capital Employed

Introduction

ROE and ROCE are the financial metrics which act as a valuable tools for measuring a company’s operational efficiency and potential for attaining future growth in value. In this article, we will compare Return on Equity(ROE) Vs Return on Capital Employed(ROCE) in detail.

Return on Equity (ROE)

  • Return on Equity (ROE) is a key aspect in fundamental analysis. It is also very important to look at while evaluating a company.
  • ROE is a measure of a company’s financial performance. It indicates the relationship between a company’s profit and the equity shareholder’s return. It shows how much profit a company generates with the money (capital) shareholders have invested.
  • ROE is also and indicator of how effective management is at using equity financing to fund operations and grow the company.
  • The higher the ROE, the more efficient the company’s operations are at making use of those funds. Since every industry has different levels of investors and income, we can not use ROE to compare companies outside of their industries very effectively.

Return on Capital Employed (ROCE)

  • Return On Capital Employed (ROCE) is a financial ratio. It determines a company’s profitability and the efficiency with which the capital is applied. A higher ROCE indicates a more cost-effective use of capital. It is also called as Return On Total Capital (ROTC).
  • So, we can say, ROCE is a profitability ratio that measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed. 
  • ROCE works especially well when comparing the performance of companies in capital-intensive sectors, such as utilities and telecoms, because unlike other fundamentals, ROCE considers debt and other liabilities as well.
  • Thus , ROCE provides a better indication of financial performance for companies with significant debt.

ROE Vs ROCE

 Return on Equity (ROE) Vs Return on Capital Employed (ROCE)
Return on Equity (ROE) Vs Return on Capital Employed (ROCE)

A viewer had asked us a question that, if a company doesn’t have any debt, neither long term nor short term, then the ROE and ROCE numbers should both be same. Logically that is true, but there are few differences there.

1. Difference by Formula :

  • ROE = Net Income (Net Profit) ÷ Shareholders Equity
  • Where, Net Income is the actually money earned by the company and is taken of the last 12 months. Here, Shareholders Equity includes Equity Capital, Reserves & Surplus and Retained Earnings.
  • ROCE = Earnings Before Interest & Taxes (EBIT) ÷ Total Capital Employed
  • Where, EBIT is Operating Profit and Total Capital Employed is the sum of Total Equity (equity share capital, reserves and & surplus and retained earnings) and Total Debt.
  • Hence, logically ROCE and ROE would be similar if the company did not have any debt. But technically, even if the company doesn’t have to pay any interest on the debts but it still has to pay the taxes. Therefore, ROCE and ROE values would be different.

2. Other Key Points of Comparison ROE Vs ROCE :

  1. ROE only considers the net return on the equity of the company (net return to only shareholders equity). While ROCE considers the return to all stakeholders in the company including equity and debt (Long-term Debt).
  2. When the ROCE is greater than the ROE, it means that the overall capital is being serviced at a higher return than the equity shareholders. A higher ROCE only leaves a greater surplus for the equity shareholders.
  3. Equity shareholders will also benefit from a higher ROCE in another way. When a company has a high ROCE, the company is able to raise debt and equity at attractive terms compared to the peer group. That means its cost of equity and its cost of capital overall will come down. This will help to improve the valuations of the company. Remember, the ROCE makes a much bigger difference to company’s overall cost of funds compared to its ROE.
  4. ROCE is a better indicator of the efficiency of utilization of capital. Since capital here becomes the sum of equity and long term debt, it is virtually a mirror image of the long term assets of the company. In other words, this also becomes a measure of the efficiency of the usage of your assets. ROE, on the other hand, is purely focused on equity shareholders and tends to gloss over the very important aspect of return on assets.
  5. Warren Buffett’s view on ROE vs ROCE : Buffett’s view is that he would prefer companies that have ROE and ROCE that are very close to each other. Ideally, for a good company, the gap should not be more than 100-200 basis points. This will imply that both the long term stake holders of the company in the form of shareholders and lenders are properly taken care of. It will also mean that any set of stakeholder is not being compromised at the cost of other.

3. Comparing ROE Vs ROCE Numbers

  • While comparing the ROCE and ROE numbers of any company one should always first look at the industry in which the company is involved.
  • If the company is involved in a capital-intensive industry, like utilities, infrastructure, telecom, and even baking to certain extent (as they too borrow money from others), then one should focus more on the ROCE number of that company. This is so as it is major task to service the debt for such companies.
  • Also, while using ROCE and ROE for analysing companies, it is important to note that we should choose the companies of the same sector.
  • For Example, you cannot compare FMCG companies with Steel companies. If you want to compare HUL you can compare it with companies of the same sector, like Godrej Consumers Products. We can not compare HUL with Tata Steel.
Bharti Airtel Rights Issue

What Is Rights Issue?

Rights Issue Explained with Example of Bharti Airtel Rights Issue

Introduction

In this article, we are going to discuss What is Rights Issue? Why does a company go for it? What is the effect of rights issue on the comapny and its shareholders? Lets also look at the details of Bharti Airtel Rights Issue.

Company Profile

  • Bharti Airtel Limited also known as Airtel is an Indian global telecommunications services company based in Delhi, India.
  • It is Asia’s leading integrated telecom services provider which operates in 20 countries across South Asia and Africa. Airtel provides GSM, 3G, 4G LTE mobile services, fixed line broadband and voice services depending upon the country of operation.
  • Bharti Airtel Ltd. is a Large Cap Company with a market capitalization of Rs.1,62,396 Crore.

Sources of Raising Money for a Company

1.Initial Public Offering (IPO)

An initial public offering is when a private company or corporation raises equity capital by offering its stock to the public for the first time. It could be a new, young company or an old company which decides to be listed (to become publicly traded) on an exchange and hence goes public.

2.Rights Issue

A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

3.Follow-on Public Offer (FPO)

If even after Rights Issue, the company couldn’t raise the capital or still has more capital requirement then the company can use the FPO source to raise funds.

What is Rights Issue?

  • Rights issue is particularly related to equity shareholders. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
  • Thus the company gives its existing shareholders the right but not the obligation to subscribe to newly issued shares in proportion to their existing holdings, at a discount to the current market price.
  • It is used for raising of equity funds when a company need additional capital. Thus, the company undertakes a rights issue when it needs cash for various objectives. 
  • For Example – 2:5 Rights Issue means an existing shareholder can buy two extra shares for every five shares already held by him/her. And the price at which the new shares are issued by way of rights issue is discounted to the current market price.
  • It is beneficial for the existing shareholders as they get additional rights (shares) at a discounted price.

Why Does A Company Go For The Right Issue?

There are 2 reasons :

1.When A Company is Cash-Strapped :
  • If the Debt of the company has become very high and it is not in a position to raise more debt then that company can do Rights Issue.
  • In such case, the company goes to the existing shareholders and ask them whether they are interested in some extra shares at a discounted rate. Not all existing shareholders are interested, but some shareholders are interested in the subscription and thus right shares are issued.
  • This is exactly what is happening in the telecom sector. The companies in the telecom sector don’t want raise any more debt.
  • The D/E ratio of Bharti Airtel is close to 1.60 and the company does want to raise any more debt. Thus, the company has declared Rights Issue and is raising capital through equity.
2.When A Company is Looking for Corporate Expansion or Takeover :
  • Right issue occurs when a company needs funds for its corporate expansion or a large takeover.
  • To issue right shares, not all companies need to be financially unhealthy. Many companies that have clean balance sheets also go for the rights.By approaching the existing shareholders they raise the capital they need for their growth and expansion.
  • Since it results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.

What Is the Effect on the Comapny and the Existing Shareholders?

A rights issue affects two important elements of a company : Equity Capital and Market Capitalisation.

1.Equity Capital :
  • Since additional equity is raised, the issuing company’s equity base rises to the extent of the issue.
  • As we have stated above, it results in higher equity base for the company. Thus, right issue provides the company with better leveraging opportunities.
2.Market Capitalization :
  • The effect on market cap depends on the perception of the market. Every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalization remains unaffected.
  • However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalization.

Rights Issue – Good or Bad?

  • Rights Issue is generally done by the companies which are involved in capital intensive sectors. These companies don’t want to increase their debt and that is why choose this method to raise capital through equity.
  • Good or bad, depends on the whether the promoter is taking part in it or not. If the promoter is taking part in the Rights Issues it can be a positive sign.
  • It also depends upon the future business prospects of the company.

Bharti Airtel Rights Issue Details

Bharti Airtel Rights Issue Details
Bharti Airtel Rights Issue Details
  • The Rights Issue of Bharti Airtel is going to be open from 3rd May 2019 to 17th May 2019.
  • The share price of Bharti Airtel on 22nd April (when Rights issue was declared) was around Rs. 350. Bharti Airtel has offered the existing shareholders rights issue at Rs. 220.
  • After that the company is also going to raise some debt. A structured Rights Issue has been declared by the company.
  • Bharti Airtel is raising a capital worth Rs. 25,000 Cr through Rights Issue. Even the promoter, Sunil Bharti Mittal, will also be participating in this Issue as an existing shareholder.
  • Significant equity commitment by promoters indicates confidence in the company’s long-term prospects and aids fund raising from external source

Conclusion :

  • Share capital increases depending on the rights issue ratio.
  • The company gets positive cash flow (from financing), which can be used to improve its operations, for corporate expansion or takeover.
  • EPS gets diluted. Dilution occurs because a rights offering spreads a company’s net profit over a wider number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.
  • Effective EPS, book value, and other per share metrics decline because of the higher number of shares.
  • Market price gets adjusted (after book close) after the issuance of right shares.

Notes :

  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that this is a bad company, or the stock of this company is bad.
  • We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
  • Only an analysis has been presented here. No judgments or final statements are being made here.

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