MANAGEMENT DEVELOPMENT INSTITUTE

FUNDAMENTALS IN FINANCE

PROJECT ON

RATIONALE BEHIND ISSUE OF BONUS SHARES

Submitted to Professor Anil Mishra

By Sandeep Reddy Jetty Himani Kansaria Aman Garg Kabeer Singh Bedi Deepak Singla

1. Introduction 1.0 Objectives 1) To study the rationale behind issue of bonus shares by companies 2) To study if there exists any relationship between sectors and issue of bonus shares 3) To study the effect on stock price due to issue of bonus shares 1.1 Methodology To study the Rationale behind issue of bonus shares we have decided to take up 5 different companies each belonging to different sectors and compare the performance of these shares with the competitors. After competitor analysis we would be analysing the reasons underlying the issue of bonus issue and finally we would be studying the effect of bonus issue on price movement of the stock for 15 days before the issue of bonus shares and 15 days after the issue of bonus shares. 1.2 Subject of study To carry out the analysis the 5 companies that we have picked up are Shree Renuka Sugars Limited, Bajaj Auto Limited, Indian Tobacco Corporation, Reliance Industries Limited and Infoedge Systems Limited. The five companies have been chosen owing to the following Reasons 1) Each company has issued bonus shares in the recent past 2) Each company belongs to a distinct sector 3) Each sector should its own distinct characteristics

1.3 Introduction to issue of Bonus shares Bonus shares are those shares which are issued to the existing shareholders for free on prorata basis. This enhances the capital base of the company. Issue of bonus shares do not affect the Balance Sheet of the company. Asset side remains the same. Liability side shows little decrease in reserves but an increase in the capital and number of shares issued. Issue of bonus shares have two implications in the mind of the people 1) Number of shares available for trading gets increased. 2) Management's positive contribution towards growth of profit. 1.3.1 The advantages of issuing bonus shares 1) Shareholders can get their undistributed profits in the form of shares 2) Without disclosing the financial position and liquidity of the company, company can keep its shareholders happy. 3) Security of the creditors gets increased due to increase in share capital. 4) It increases marketability of the shares as the number of shares increases in the hands of the existing shareholders. 1.3.2 Disadvantages of issuing bonus shares 1) Issue of bonus shares declines the rate of dividend in future. 2) It encourages speculative dealings in shares of the companies. 3) Approval of SEBI is necessary before issue of bonus shares. Hence, it is a lengthy process. It may delay in the issue of shares.

Chapter 2 Analysis of individual company for the factors that led to issue of Bonus shares

2.1 Shree Renuka Sugars Limited 2.1.1 Introduction Shree Renuka Sugars Limited is the largest manufacturer of Sugar and ethanol. The company has 4000 TPD Sugar refining capacity and 300KLPD ethanol distillation capacity. The company was started by taking over sick co-operative sugar companies in 1995. The company in its initial days had 10,000 farmers who accounted for 25% of the total equity share. In 2004 the company went for its first IPO and issued 20,00,00,000 shares each of which had a Face value of Rs. 10 and each share was offered at 150 Rupees each. The company has steadily grown to have a total market capitalization of Rs 2840 Crores. It has been consistently given Dividends which never crossed Rs.1 per equity share. The stocks were spit at 10:1 Ration on 10-04-2008.Later on 15-03-2010 the company Issued its first ever Bonus issue. Figure 1.0: Capital Structure of Shree Renuka Sugars PERIOD From 2009 2008 2007 2006 2005 2004 To 2010 Equity Share 2009 Equity Share 2008 Equity Share 2007 Equity Share 2006 Equity Share 2005 Equity Share Instrument Authorize d Capital In Crores 70 35 35 35 35 35 Issued Capital In Crores 67 31.69 27.6 24.81 23.81 20 Shares number In Crores 67 31.69 27.6 2.48 2.31 2.0 1 1 1 10 10 10 Face Value Capital (In Crores) 67 31.69 27.6 24.81 23.81 20

2.1.2 Past Performance of Shree Renuka sugars Ltd Renuka Sugars has been performing consistently well right from its inception. Its market capitalization has grown by 651%. Its reserves have swollen to more than 1500 Crores from 40 Crores in 2009-2010 financial Years (Annexure 1 and Annexure 2). It has also been giving bonus which is equivalent to Re.1 or (100%) per each share. On 15 th march 2010 it has issued bonus share at 1:1 which means that every share holder would be getting one share for every share held by him as a bonus share. 2.1.3 Competitor Analysis Sugar sector has been dominated by companies that have been in service for more than 20 years. Major competitors for SRSL have been EID PARRY, Bajaj Hindustan, Triveni Engg and Balrampur chini. SRSL in spite of being a relatively new entrant has outperformed every other company by diversifying into Bagasse based power generation and ethanol manufacture and distribution. It is the first company to have gone for international

expansion. SRSL holds the highest market capitalization of 5800 Crores (Annexure 3) in the sugar sector. Figure 2: Dividend issued and Reserves & surpluses of major sugar manufactures S.no Company name Dividend issued as Reserves and Surplus in percentage of face value in 2009-2010 2009 In Crores 800% 200% 70% 100% 800% 1145 1211.92 2257 880.67 1073

1 2 3 4 5

Balrampur chini Shree Renuka Sugar Bajaj Hindustan Triveni Engg & Industries EID parry

Bonus issue is not common in sugar sector. In fact no company has issued bonus shares in the recent past (with the exception of Triveni Engg which issued bonus shares in 2005). This could be attributed to the seasonal nature of sugar industry. Further this industry is also dependent on government regulations on sugar exports. Sugar industries have traditionally been cash strapped. But with reduced regulations of government on exports and its change of policy on allowing forward contacts, sugar companies posted record profits in the post 2005 period which has led to a positive Reserve. Further international demand for sugar prices in 2009 led to record profits and soaring Reserves and surpluses which translated to high share prices (In spite of recession effect). Companies on their part gave away unprecedented Dividends. 2.1.4 Rationale behind Bonus issue The company had posted a very strong growth in the recent years. Offering a dividend of Rs.1 for each shareholder would have cost 20.76 Crores for the company. On the other hand the company has been on a large expansion plan. It brought sick plants at Brazil and other Latin American countries where cost of sugar cane is lowest. Cost per production of 1kg of sugar is lowest in Brazil and it is important for company to expand its operations to Brazil in order to stay competitive in the market. Hence giving out a bonus of such large value would have led to difficulties in financing the new projects. On the other hand share holders on their part look forward for dividend in addition to capital appreciation. Thus price of the stock has got a strong impact on the amount given as the dividend. Further giving dividend is considered to portray a company in positive financial light. Thus it is of utmost importance for the company to compensate shareholders. The only way left for the company to compensate its share holders without giving dividend is to issue bonus shares. Thus giving bonus shares has helped company to retain Rs 20.76

Crores as share capital. And share holders on their part have double the number of share which has lead to a win-win situation for both company and share holders. 2.1.5 Effect of Bonus issue on share price Shree Renuka Sugars Limited had issued bonus shares on 15 th march 2010. Inspite of the Rumours that SRSL would be issuing a bonus shares the share prices have fallen gradually till the date of issue of bonus shares. Post March 15 th the price rather remained constant without many variations. This is in contrast to usual market behaviour where prices increase till the date of issue of bonus shares and there after decrease gradually. One reason that could be attributed to this unusual behaviour is that the demand for sugar dropped suddenly in the international market which had effect on the share prices of all the stocks in sugar sector (REF). (EID Parry saw a reversal of trend due to expectation of high dividend yield which was about 500%) With strong downgrade pressure on the stock due to expected future below par performance due to lower international demand the SRSL stock saw a significant lowering of its price Figure 3: Stock Price movement during the issue of bonus shares by SRSL S.no 1 2 3 4 5 Company name Balrampur chini Shree Renuka Sugar* Bajaj Hindustan Triveni Engg & Industries EID parry Share price on Share Price on Share Price On 1st march 15th march 30th march 103.1 162 150.8 115.13 339 95.02 151.2 148.8 115.27 353.7 95.56 72.05 137.8 135.3 337.12

*The share price of Renuka sugars has been readjusted to half of 151.2 at the end of 15th march due to issue of bonus shares.

2.2 Info Edge Systems Limited 2.2.1 Introduction The Company was incorporated on May 1, 1995 under the Companies Act, 1956 as Info Edge (India) Private Limited and converted into a Public Limited on April 27, 2006. Info Edge (India) is a leading provider of various portals related to online recruitment, matrimonial, real estate and education classifieds and related services in India. Info Edge India Ltd reported a rise of 24.53% in sales (stand alone) for the quarter ended June 2010. Info Edge (India) Ltd proposes to invest up to Rs. 7 million in DC Foodiebay Online Services Pvt. Ltd. Applects now subsidiary of Info Edge in which they have invested an additional Rs.50 million. Net Sales and PAT of the company are expected to grow at a CAGR of 7% and 5% over 2009 to 2012E respectively. 2.2.2 Capital Structure

The Board of Directors of Info Edge had fixed September 28 as the Record Date for determining the entitlement of bonus allotment in the ratio of 1:1 (i.e. one new equity share held) to those equity shareholders whose name appear on the Register of Members on the Record Date. With this allotment, the total issued and paid-up capital of the company has increased to Rs. 54.59 Crore comprising of 54590512 equity shares of Rs. 10 each. Further, the company shortly took steps to obtain the approval of the shareholders to increase the authorized share capital from the present Rs 40 Crore to Rs 60 Crore. 2.2.3 Past performance of info edge Info Edge has been performing consistently well right from its inception. Info Edge's market cap (average for September '08) stood at Rs 2,056.7 Crore, while the three-year average RoCE was recorded at 60.4% and ICR at 11.4. Its sales recorded a three-year compound average growth rate of 70.6%, while the CAGR of profit after tax stood at 451.8%. Its reserves have swollen to more than Rs.352.07 Crores from Rs.296.62 Crores in 2009-2010 financial Years. It has also given bonus. On 28th September 2010 it has issued bonus share at 1:1 which means that every share holder would be getting one share for every share held by him as a bonus share. More importantly, in terms of cash returns, Company has actually grown in these adverse conditions. With a significant increase in cash flows, company has further strengthened its balance-sheet. This provides a major competitive edge in developing businesses to gain market share and future profits.

2.2.4 Competitor analysis

Info edge is Indias one of the fastest growing company in IT sector. IT sector has been recently dominated by many companies. Major competitors for Info edge have been CRISIL, Cox & Kings etc. Info Edge in spite of being a relatively new entrant has outperformed some of the companies. Bonus issue is common in IT sector. In fact none of its competitors has issued bonus shares in the recent past. Info Edge on their part gave away regular Dividends. 2.2.4 Rationale behind Bonus issue Bonus shares are issued to the existing shareholders by converting free reserves to equity capital without taking any consideration from investors. Info Edges reserves have swollen to more than Rs.352.07 Crores from Rs.296.62 Crores in 2009-2010 financial Years. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future. A bonus issue is taken as a sign of the good health of the company. Effectively, a bonus issue is nothing but an accounting trick wherein there is a change in the structure of a company's networth paidup capital rises and there is an equivalent fall in retained earnings. But as the networth itself remains unchanged, the bonus issue has no effect on a company's share price. The bonus issue raises the supply of shares and thus improves the liquidity in the counter, which is also desirable

2.2.5 Effect of Bonus issue on share price Info Edge had issued bonus shares on 27th September 2010. Because of the Rumours that Info Edge would be issuing a bonus shares the share prices have remained constant till the date of issue of bonus shares. Post March 27 th the price started rising till 8th October 2010. Then it gradually started decreasing and after 18th October 2010 it again became constant. This is the common trend to usual market behaviour where prices increase till the date of issue of bonus shares and there after decrease gradually. One reason that could be attributed to this behaviour is due to expectation of high dividend yield Share Price Movement During The Last 12 Months Period 3-Days 5-Days 7-Days 15-Days 1-Month 3-Month 6-Month 9-Month 1-Year Open Close Gain/Loss (Rs.) 955.95 997.00 41.05 939.95 997.00 57.05 928.65 997.00 68.35 897.40 997.00 99.60 901.95 997.00 95.05 924.00 997.00 73.00 859.15 997.00 137.85 791.60 997.00 205.40 611.10 997.00 385.90 4.29 6.07 7.36 11.10 10.54 7.90 16.04 25.95 63.15 % Gain/Loss

2.3 Bajaj Auto Limited 2.3.1 Introduction Bajaj Auto is a major Indian automobile manufacturer started by a Rajasthani merchant. It is based in Pune, Maharashtra, with plants in Chakan (Pune), Waluj (near Aurangabad) and Pantnagar in Uttaranchal. The oldest plant at Akurdi (Pune) now houses the R&D centre. Bajaj Auto makes and exports motor scooters, motorcycles and the rickshaw. Bajaj Auto came into existence on November 29, 1945 as M/s Bachraj Trading Corporation Private Limited. It started off by selling imported two- and three-wheelers in India. In 1959, it obtained license from the Government of India to manufacture two- and three-wheelers and it went public in 1960. From a position where all the two wheelers of the company made a loss around five years ago today Bajaj has got an operating profit margin of around 15% which is one of the highest in the automobile industry. The company enjoys a market share of about 30 % and this enables them to have cash reserves to the tune of Rs. 5000 Crores. The company has snatched market share from Hero Honda and has increased its share by 8% from 25% in Q1 FY10 to 33% in the latest quarter. The board also approved a 1:1 bonus issue of shares on 22 July 2010. Bajaj's turnover went up to Rs 3,972 Crore from Rs 2,362 Crore while net profit stood at Rs 590 Crore, up from Rs 293 Crore in the year-ago period. The company has almost doubled its other income to Rs 152.77 Crore from Rs 79.48 Crore. Profit from operations went up by 77%, from Rs 422 Crore to Rs 745 Crore.

2.3.2 Past Performance of Bajaj Auto 1997 May 15, 1997 It can be in any ratio, said Bajaj Auto chairman Rahul Bajaj. The financial results and the bonus issue surprised marketmen. As a result, the scrip bounced back smartly from Rs 824 to Rs 934.50 before settling at Rs 915.25 on the Bombay Stock Exchange on Wednesday. Mar 2, 1998 - Godrej and Bajaj Auto have joined hands to come up with Godrej Bajaj Auto Finance in a bid to provide quicker credit for easy buys Under the

1998

scheme ... Partners stakes in Airbus Industrie are unlikely to change much if the plane making consortium is converted into the planned joint stock . 2004 Dec 2004 - The Bajaj Auto stock took a pounding on Wednesday after it announced a relatively lacklustre earnings performance for the quarter ended December 2004. The share price of Bajaj Auto dropped by about 6 per cent or Rs 61.95 to close at Rs 1021.65.Bajaj Auto, Satyam Computer, ITC and Ranbaxy Laboratories were prominent losers amongst the stocks that form part of the index. The Bajaj Auto stock took a pounding after it announced a relatively lacklustre earnings performance for the quarter ended December 2004. The share price of Bajaj Auto dropped by about 6 per cent or Rs 61.95 to close at Rs 1021.65. Sep 2005 - While that decision may be strategic, going by Bajaj Auto's performance, it is fully justified; say those who track the stock. For instance, Bajaj Auto achieved its highest ever sales in a single month in September, 2005. Mar 31, 2006 - The shareholding of Bajaj Auto in ICICI Bank as on March 31, 2006 was 2,41,32703 shares amounting to a 2.71% stake in the company and post the acquistion, the shareholding would increase to 3,67,04181 shares. This works out to just over 4% of the ...The shareholding of Bajaj Auto in ICICI Bank as on March 31, 2006 was 2,41,32703 shares amounting to a 2.71% stake in the company and post the acquistion, the shareholding would increase to 3,67,04181 shares. This works out to just over 4% of the bank's equity. Bajaj Auto has upped its stake in ICICI Bank as part of its investment portfolio, a company spokesperson said. The ICICI Bank stock closed with a gain of Rs 13.80 (up 2.84%) at Rs 499.50 May 17, 2007 - Choksey considers it a smart move on the part of the company that they kept the investment part of the company with Bajaj Auto Ltd. The company has smartly managed the capital gains tax part of the business by keeping the investment part of the activity with Bajaj Auto Ltd . Oct 2009 - "Bajaj Auto had been facing stiff resistance around the levels of Rs1,5921600 from October 2009. The stock overcame the crucial resistance levels and closed above it. The up move was accompanied with heavy volumes. Moreover, on the weekly chart ..."Bajaj Auto had been facing stiff resistance around the levels of Rs1,592-1600 from October 2009.The stock overcame the crucial resistance levels and closed above it. The up move was accompanied with heavy volumes. Moreover, on the weekly chart, the price movement has formed a higher bottom formation May 14, 2010 - Bajaj Auto rose 2.89%, with the stock rebounding after last three days' losses. The stock had hit a record high of Rs 2219.90 in intraday trade on 14 May 2010, boosted by strong Q4 results.

2005

2006

2007

2009

2010

2.3.3 Competitor Analysis It has been more than 50 years now that bikes have been ruling the Indian automobile sector. In 1955, the Indian government needed sturdy and reliable motorcycles for its Army and police to patrol the rugged border highways. The first batch of 350cc Bullet - the super bike in India of all times, from the Royal Enfield Company of UK were received and assembled at Chennai. Since then, bikes in India have been flourishing as a two wheelers segment, and Indian bikes gaining on popularity all across the world. Market Capitalization of auto companies Last Price Bajaj Auto Hero Honda TVS Motor Mah Scooters LML Kinetic Motor 1,611.15 1,931.40 83.90 415.00 13.05 33.90 Market (Rs. cr.) 46,621.37 38,567.64 3,985.98 474.29 106.99 80.50 Cap.Sales Turnover 11,920.98 15,860.51 4,430.13 4.42 235.92 15.70 Net Profit 1,700.11 2,231.83 88.02 8.41 -40.01 97.61 Total Assets 4,266.92 3,531.05 1,868.67 200.56 -75.57 29.99

One of its main competitors,Hero Honda Motors Limited, based in Delhi, India[clarification needed] is a joint venture between the Hero Group of India and Honda of Japan[2][3] It has been referred to as the world's biggest manufacturer of 2-wheeled motorized vehicles since 2001, when it produced 1.3 million motorbikes in a single year. During the fiscal year 200809, the company has sold 3.28 million bikes and the net profit of the company stood at 1,281.7 Crore (US$ 290.95 million) up 32% from the previous fiscal year.[verification needed][3] Hero Honda has been the largest two wheeler company in the world for nine consecutive years. The company had a market share of 41.35% in the year 2008-2009 and over a 25 year span it has crossed the 15 million unit milestone. Hero Honda sells more two wheelers than the second, third and fourth placed two-wheeler companies put together. But the trend is now swinging the Bajajs way only. Bajaj Auto sold a total of 2.66 lakh vehicles in January 2010 versus 1.32 lakh in the corresponding period of 2009. Two-wheeler sales in January came in at 2.33 lakh units versus 1.09 lakh units. The domestic bike sales came in at 1.8 lakh versus 67,000 units last year. The market share too has grown from 21% to 32%. 2.3.4 Rationale behind Bonus issue The reason why Bajaj auto announced the bonus is to carry out their massive product expansive plans and taking its growth story to the next level by investing on its pulsar range and bringing in the Kawasaki products.

So, to create more value in shareholders funds and rather than to distribute companys hard earned funds, they preferred to reinvest these funds in order to maximise capital return and creating values. As by doing this, they solved the dual issues of satisfying the shareholders and creating value for them. 2.3.5 Effect of Bonus issue on share price

The dip in middle was due to issuance of bonus issues which roughly bought down its share to half the market value price then as expected. So keeping the total shareholder money intact and just by transferring the reserves and surplus money to shareholders funds, it created ways to create the most efficient capital value.

2.4 Reliance Industries Limited 2.4.1 Introduction Reliance Industries Limited (RIL) is Indias largest private sector company on all major financial parameters. Oil refining and the manufacture of polyolefins account for nearly all of Reliance Industries' sales. It also makes textiles and explores for oil and gas, though those businesses are comparatively small. Reliance Industries operates more than a dozen manufacturing plants in India. In 2009 the company fully integrated its oil and gas refining subsidiary, Reliance Petroleum, in an effort to consolidate the company's position as a major player in the global refining business. Its financials:

Annexure has complete Balance Sheet and detailed calculation of various ratios for Reliance Industries in last five years. Capital structure for last ten years for Reliance industries is given below.

They were issuing dividend of 130% in year 2008 and 2009 and 70% in year 2010. This helped them grow their cash reserve by retaining good part of their profit. Reserves of company has increased from around 43 thousand Crore in 2006 to 125 thousand Crore in 2009/10. On 7th October 2009, board of Reliance industries announced issue of 1:1 bonus share. This comes after a 12-year-hiatus. Last time the company announced a bonus issue was in Oct 1997. RIL recommended an issue of one bonus share for every share held by shareholders, which the company felt would help unlock value.FY12E

2.4.2 Effect on share prices Shares of Reliance Industries closed at Rs 1,064.60 on the Bombay Stock Exchange on the record day of bonus share, down by over 3 per cent from the opening price, as the company went ex-bonus. The scrip opened at Rs 1,100 after factoring in the bonus issue of one share for every share held. The scrip closed at Rs 1,064.60, down by Rs 35.4, or 3.22 per cent, against its opening price on BSE. The trend during one week prior to record date and one week after record date is given below:

Courtesy: www.moneycontrol.com The scrip was one of the top traded counters on the bourse and witnessed a total turnover of over Rs 667.27 Crore on that day. Nearly 62 lakh shares changed hands on both the bourses. Reliance Industries, which carries the most weight on the benchmark Sensex, has gained as much as 78 per cent from Rs 1,230.25 on December 31, 2008 to 27, November 2009. There was increase in share price, before the date of bonus share but as date of bonus approached, value of shares started coming down. This reflects interests of shareholder to gain from issue of extra shares. Other time, other factors started playing role in movement of share prices that may include decision regarding RNRL vs RIL case. 2.4.3 Peer Group Comparison Its main competitors are ONGC, GAIL, Cairn India and others.

Reserves and surplus of companies like ONGC increased from around Rs 52 thousand Cr to 85 thousand Cr from 2006 to 2010, they issued their last bonus share in 2006. Their dividend payout is around Rs32-33 in last few years. In case of GAIL, reserves increased from around Rs 9 thousand Crore to 15 thousand Crore and for Cairn it is, from Rs 25 thousand Crore to 29 thousand Crore. Same figure for Reliance are from Rs 45 thousand Crore in 2006 to huge Rs 125 thousand Crore in 2010. This gives a reason why Reliance went for issue of Bonus Shares, which facilitated movement of huge fund from R&S to Capital. 2.4.4 Possible Rational behind their move Few facts during the time of issue of bonus shares: The RIL board also proposed an interim dividend of Rs 13 per share for 2008-09 which will entail an outgo of Rs 2,219 Crore, and will include Rs 322 Crore in taxes. RIL had created value of Rs 2,47,000 Crore in market capitalisation since its demerger with the RPL and thus the shareholders have earned a 40 per cent compounded return. A strong balance sheet, large cash reserves and a great deal of financial flexibility because of its Treasury stock holdings, which were calculated at nearly Rs 40,000 Crore. Company sold 1.5 Crore treasury shares worth Rs.3,188 Crore. RIL is presently locked in a battle with Reliance Natural Resources Ltd because of the pricing of gas from the KG basin. That time analysts expected the RIL share bonus issue is also aimed at putting pressure on the Anil Ambani group and pushes them to come up with such similar announcement. So it can be seen that multiple factors can be behind the reason for reliance going for issue of bonus shares and prominent among them is huge reserves and surplus that they had compared to any other players in that category. Also there was reflection of this decision on prices of share which acted in favour of shareholders in increasing value of their shares. But soon this effect started losing its importance in presence of other factors. Also for companies operating in this segment, it is seen that having surplus is advantageous. In this sector, having extra leverage is beneficial for global acquisitions as there is increasing trend of acquisitions at global level in oil exploration sector. So decision such as this is in complete harmony with these realities of sector.

2.5 Indian tobacco Corporation 2.5.1 Introduction ITC is one of India's foremost private sector companies with a market capitalization of nearly US $ 19 billion and a turnover of over US $ 5.1 Billion. ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by Business World and among India's Most Valuable Companies by Business Today. ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of the country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach. ITC's wholly owned Information Technology subsidiary, ITC Infotech India Limited, is aggressively pursuing emerging opportunities in providing end-to-end IT solutions, including e-enabled services and business process outsourcing. ITC's production facilities and hotels have won numerous national and international awards for quality, productivity, safety and environment management systems. ITC was the first company in India to voluntarily seek a corporate governance rating. ITC employs over 25,000 people at more than 60 locations across India. Capital structure for last ten years for ITC is given below.

2.5.2 Past Performance of ITC ITCs robust growth of Net Profit is increased by 21.81% Rs.10703.10 million. Its reserves have swollen to more than 13600 Crores from 8600 Crores in 2009-2010 financial Years. On 4th august 2010 it has issued bonus share at 1:1 which means that shareholders will get one share for every existing share by way of a bonus issue. The companys revenue and PAT of the company are expected to grow at a CAGR of 14% and 27% over 2009 to 2012E respectively.

ITC Ltd. has an equity capital of Rs. 381.82 Crore as of 2010 March. The face value per share is Rs 1. At the current price of Rs 301.95, the P/E multiple stood at 28.37 with book Value of 46.48 and P/BV at 6.50. The total shareholding pattern of the company as on Dec 2009 stood at Promoters- 0.00%, Institutional Investors- 50.60%, General Public- 11.64% and other investors-37.76%. The stock had outperformed the market over the past one month till 22/06/2010 surged 12.54% as compared to the Sensex''s return of 7.77% and NSE Nifty''s 7.77% returns. The stock had outperformed the market over the past one quarter till 22/06/2010 surged 14.44% as compared to the Sensex''s return of 1.09% and NSE Nifty''s 1.09%returns. Regarding the financial performance, ITC Ltd. has recorded a surge in its net profit by 27 % for the Q-4 of the last financial year (2009-10) to Rs 1,028.20 Crore as compared to Rs. 808.99 Crore in the corresponding period of previous year. The company net income during Q-4, surged by 29 % to Rs. 5,131.61 Crore as against Rs. 3,985.92 Crore recorded in the previous year.

2.5.3 Rationale behind Bonus issue ITC the multi-business conglomerate announced its first foray into the fairness creams segment today with the launch of Vivel Active Fair so they believed that they are optimistic about their future. In fiscal 2010, its cash flows from operations were up 40% to Rs6,620. 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. This business also saw its capital employed fall by 18%, a sign that it is becoming more self-sufficient. It generates a lot of cash, for which it has no big capital expenditure plans lined up. On the other hand It has already made significant investments in the capital-intensive portion of its business portfoliopaper and hotels. The bonus issue, 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. If the company maintains its dividend ratio, the payout shoots up. On the other hand a bonus does not make any difference, because the companys net worth (equity capital plus free reserves) remains the same. In ITCs case, an amount equivalent to the bonus will be transferred from reserves to equity capital. In ITCs case, it would double. And this would be on the back of a step-up in ITCs 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. 2.5.4 Effect of Bonus issue on share price ITC has issued Bonus shares 2nd june which was equivalent to 1000%(Ref). This was beyond market expectations and led to upward pressure on the market. Further positive economic indications and the positive feeling that world has come out of the recession blues lead to price increase of not only ITC but also all FMCG stocks(Ref). This is contrary to the expected market behaviour where in prices are expected to increase till Bonus issue and decrease after the issue of bonus shares. 2.5.5 Variation of stock prices of ITC

Dividend payout by ITC and its competitors Name of the Market company CMP(Rs.) Cap.(Rs.Mn.) ITCLtd 174.85 1335239.8 MaricoLtd 131.25 80497.1 HUL 293.75 638874.1 DaburLtd 108.00 187998.2

EPS(Rs.) P/E(x) 5.50 31.45 3.93 33.40 10.04 29.26 2.43 44.44

Dividend P/Bv(x) (%) 9.55 1000.00 14.08 65.99 24.81 650.00 25.06 200.00

Dividend issued and Reserves & surpluses of competitors S.no Company name Dividend issued percentage of face value as Reserves and Surplus in 2009-2010 In Crores 1 2 3 4 ITC Ltd Marico Ltd HUL Dabur Ltd 1000% 65.99% 650% 200% 13,628.17 510.73 2,364.68 662.48

Stock Price movement during the issue of bonus shares by ITC

3. Conclusions and Inferences On studying the five companies it has been observed that bonus shares were issued owing to the excess cash reserves and comparatively better performance over the other companies in that particular segment. It has also been observed that companies preferred to issue bonus as a measure to compensate its share holders. Bonus shares have been issued over the dividend in most cases. Also most companies have issued it in a period where the outlook of the company has been positive and there were large scale investments in the pipeline for future expansions. It was also found out that issue was of bonus shares was not limited to sectorial trend as it was found in the cases of ITC, Shree Renuka Sugars and Bajaj auto where in issue of bonus shares were done only by the said companies and not by any of their competitors in the recent past. Further one most important factor that has been observed across all the companies is that companies have grown by over 30 percent in the year2009-2010. Further it can be concluded that issue of bonus shares has had no effect on the movement of the share prices on the short run. In most cases it was found out that market conditions and outlook dominated the price movements. Positive outlook across the FMCG sector led to the increase in share value for the FMCG stocks and bad outlook on sugar sector has been attributed to the loss of market value of sugar stocks. Thus the effect of bonus issue of shares on share price can be concluded to be negligible.

4.References 1. Effect of bonus issue announcement on stock returns using market model. Journal of International Finance and Economics Article date: January 1, 2007 Author: Malhotra, Madhuri; Thenmozhi, M.; Arun Kumar, G 2. Annual report, Sept-2010, Shree Renuka Sugars Limited 3. Annual Report, April-2010, Bajaj Auto Limited 4. Annual Report, April-2010, Info Edge Software Limited 5. Anuual Report, April-2010, ITC Limited 6. Annual Report, Reliance Industries Limited 7. http://www.articlesbase.com/tutoring-articles/issue-of-bonus-shares-2220044.html 8. http://www.business-standard.com/india/news/stock-splits-bonus-issues-gathersteam-in-india-inc/411508/

Annexure 1 Balance Sheet of Shree Renuka Sugars ------------------- in Rs. Cr. ------------------Sep '05 12 mths Total Share Capital Equity Share Capital Share Application Money 20.00 20.00 0.00 Sep '06 12 mths 23.81 23.81 0.00 0.00 198.63 0.00 222.44 354.44 16.69 371.13 593.57 Sep '06 12 mths 162.96 43.60 119.36 331.29 0.55 112.18 53.91 12.09 178.18 Sep '07 12 mths 24.81 24.81 6.26 0.00 304.68 0.00 335.75 621.09 25.91 647.00 982.75 Sep '07 12 mths 631.37 69.06 562.31 207.73 16.76 100.17 38.69 20.71 159.57 Sep '08 12 mths 27.60 27.60 23.09 0.00 589.26 0.00 639.95 827.58 159.76 987.34 1,627.29 Sep '08 12 mths 778.87 87.72 691.15 513.95 150.57 186.91 48.64 7.47 243.02

Preference Share Capital 0.00 Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 43.72 0.00 63.72 83.87 2.39 86.26 149.98 Sep '05 12 mths Gross Block Less: Depreciation Net Block Accum. 140.32 34.82 105.50

Capital Work in Progress 7.62 Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets 0.55 112.35 19.83 10.02 142.20

Loans and Advances Fixed Deposits Total CA, Advances Loans &

25.77 52.69 220.66 0.00 168.70 15.71 184.41 36.25

82.92 5.08 266.18 0.00 99.45 31.93 131.38 134.80 7.58 593.58 192.37 93.43

186.23 9.96 355.76 0.00 122.94 38.98 161.92 193.84 2.11 982.75 148.50 132.81

323.12 5.92 572.06 0.00 248.95 53.09 302.04 270.02 1.61 1,627.30 44.50 22.35

Deferred Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets

Miscellaneous Expenses 0.07 Total Assets Contingent Liabilities Book Value (Rs)
Source: www.moneycontrol.com

149.99 18.41 31.86

Annexure 2: Quarterly results of Renuka Sugars

Source: Renuka sugars website

Annexure 3: Market Capitalization of Sugar companies Market Capitalization of Sugar companies Company Name Last Price % Chg 52 High 123.60 567.00 143.50 242.90 148.40 1,370.00 1,573.85 158.60 145.00 83.90 37.65 33.40 wk 52 Low 51.50 319.95 86.00 98.80 67.10 827.00 925.00 53.10 113.55 18.25 14.70 18.30 wk Market (Rs. cr) 5,700.00 4,059.45 2,694.85 2,213.04 1,986.17 960.93 939.62 362.52 313.22 279.12 273.76 218.27 Cap

Shree Renuka EID Parry Triveni Engg Bajaj Hind Balrampur Chini Bannariamman Sarasind Dhampur Sugar Andhra Sugar Empee Sugars Bajaj Hindusthan KCP Sugar
Source: www.moneycontrol.com

85.10 469.05 104.50 115.65 76.50 840.00 1,275.00 67.25 115.55 66.50 23.20 19.25

-3.68 -3.03 -1.69 -0.39 -1.16 -2.91 -1.21 -1.47 1.14 -0.97 7.41 -1.28

Annexure 4: Balance sheet of ITC

------------------- in Rs. Cr. ------------------Balance Sheet of ITC Mar '06 Mar '07 12 mths 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 375.52 376.22 375.52 376.22 0.00 0.00 0.00 0.00 8,626.79 10,003.78 59.17 57.08 9,061.48 10,437.08 25.91 60.78 93.82 140.10 119.73 200.88 9,181.21 10,637.96 Mar '06 Mar '07 12 mths 12 mths Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 6,227.17 7,134.31 2,065.44 2,389.54 4,161.73 4,744.77 399.97 1,130.20 3,517.01 3,067.77 2,636.29 3,354.03 547.96 636.69 67.47 103.54 3,251.72 4,094.26 1,188.42 1,390.19 788.35 796.62 5,228.49 6,281.07 0.00 0.00 2,736.95 3,113.01 1,389.04 1,472.84 4,125.99 4,585.85 1,102.50 1,695.22 0.00 0.00 9,181.21 10,637.96 98.72 23.97 129.56 27.59 Mar '08 12 mths 376.86 376.86 0.00 0.00 11,624.69 56.12 12,057.67 5.57 208.86 214.43 12,272.10 Mar '08 12 mths 8,959.70 2,790.87 6,168.83 1,126.82 2,934.55 4,050.52 736.93 153.34 4,940.79 1,949.29 416.91 7,306.99 0.00 3,619.76 1,645.33 5,265.09 2,041.90 0.00 12,272.10 308.08 31.85 Mar '09 12 mths 377.44 377.44 0.00 0.00 13,302.55 55.09 13,735.08 11.63 165.92 177.55 13,912.63 Mar '09 12 mths 10,558.65 3,286.74 7,271.91 1,214.06 2,837.75 4,599.72 668.67 68.73 5,337.12 2,150.21 963.66 8,450.99 0.00 4,121.59 1,740.49 5,862.08 2,588.91 0.00 13,912.63 261.36 36.24 Mar '10 12 mths 381.82 381.82 0.00 0.00 13,628.17 54.39 14,064.38 0.00 107.71 107.71 14,172.09 Mar '10 12 mths 11,967.86 3,825.46 8,142.40 1,008.99 5,726.87 4,549.07 858.80 120.16 5,528.03 1,929.16 1,006.12 8,463.31 0.00 4,619.54 4,549.94 9,169.48 -706.17 0.00 14,172.09 258.73 36.69

Annexure 5: Financial Statement of ITC (Rs. in Crores) Unaudited Financial Results for the Quarter and Half Year ended 30th September, 2010 (Standalone) Twelve Quarter Quarter Half-Year Half-Year months ended ended ended ended ended 30.09.2010 30.09.2009 30.09.2010 30.09.2009 31.03.2010 (Audited) GROSS INCOME 7572.54 6429.68 14744.69 12698.38 26862.98 NET SALES (1) 5061.20 4352.26 9877.83 8499.84 18153.19 OTHER OPERATING INCOME (2) 85.98 52.69 116.69 102.93 229.05 NET INCOME (1+2) (3) 5147.18 4404.95 9994.52 8602.77 18382.24 EXPENDITURE a) (Increase) / decrease in stock-in-trade and work in (211.16) (36.04) (310.94) 22.29 175.24 progress b) Consumption of raw 1789.30 1453.55 3357.83 2698.76 5797.96 materials c) Purchase of traded goods 275.06 179.16 597.44 396.93 998.20 d) Employees cost 261.18 241.98 603.10 524.14 1002.77 e) Depreciation 163.99 148.39 323.67 299.98 608.71 f) Other expenditure 1157.91 976.18 2235.11 1983.20 4105.02 g) Total (4) 3436.28 2963.22 6806.21 5925.30 12687.90 PROFIT FROM OPERATIONS BEFORE OTHER INCOME(5) 1710.90 1441.73 3188.31 2677.47 5694.34 AND INTEREST (3-4) OTHER INCOME (6) 124.49 68.44 222.97 156.01 374.33 PROFIT BEFORE INTEREST (7) 1835.39 1510.17 3411.28 2833.48 6068.67 (5+6) INTEREST (Net) (8) 5.36 18.14 11.16 23.98 53.36 PROFIT AFTER INTEREST AND (9) 1830.03 1492.03 3400.12 2809.50 6015.31 BEFORE TAX (7-8) TAX EXPENSE (10)583.29 482.12 1083.07 920.89 1954.31 NET PROFIT AFTER TAX (9(11)1246.74 1009.91 2317.05 1888.61 4061.00 10) PAID UP EQUITY SHARE (12)767.74 378.02 767.74 378.02 381.82 CAPITAL (Ordinary shares of Re. 1/each) RESERVES EXCLUDING (13)13628.17 REVALUATION RESERVES EARNINGS PER SHARE (Rs.) (14) - Basic (Rs.) 1.63 1.33 3.03 2.48 5.34

- Diluted (Rs.) PUBLIC SHAREHOLDING - NUMBER OF SHARES PERCENTAGE SHAREHOLDING

1.61 1.32 2.99 2.47 5.31 (15) 76497916183763685766764979161837636857663803475806 OF 99.64 99.56 99.64 99.56 99.61

Annexure 6: Financial Statement of Bajaj Auto