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Bonus share helps beat Street’s sinking feeling

Crompton Greaves, Pidilite, Shree Renuka Issue Free Shares, Make Smart Gains In A Weak Market


   A spate of bonus announcements by medium- and small-sized companies has brought cheer to their shareholders in otherwise bearish stock market conditions. The bonus issues have helped the stocks record smart gains even as broader indices declined sharply over the past one week.


   Over a dozen companies have decided to reward their shareholders with free shares since January this year. With no immediate trigger in sight post the earnings season, their moves would keep the investor morale high and offer much needed support to the share price, according to analysts. The list includes companies like Crompton Greaves, Pidilite and Shree Renuka Sugars, among a few notable examples. Bonus are free shares given to an existing shareholder, based on the number of shares he or she owns in the company. They are given out of free reserves that the company accumulates over a period of time.


   Though many companies have been issuing free shares, analysts, however, advise investors to adopt selective approach while taking a call on the basis of bonus issue. A company should be fundamentally sound with a consistent profit-making track record so that it will be able to service the enhanced capital, post bonus. Companies like Crompton Greaves and Pidilite are fundamentally sound and so it makes sense for them to issue bonus shares, he added.


   Shares of the two companies that have seen good momentum on the back of the bonus announcements. Crompton Greaves gained 11% to Rs 440 in just three trading sessions. The company board recommended a 3:4 bonus at its meeting held on January 28. Pidilite has offered a liberal 1:1 bonus to shareholders. The stock scaled a 52-week high of Rs 229 on January 6 though it lost some ground subsequently before closing at Rs 194 on Monday.


   The list of bonus issuers also includes some small-cap companies where the rise in the share price has been much sharper. For instance, Suprajit Engineering has shot up 40% in the past one month, closing at Rs 147 on Monday. The company not only doled out a 1:1 bonus but also offered it shareholders a special dividend of 25% in addition to the interim dividend of 20% for FY10.


   An increasing number of companies are likely to join the bonus bandwagon with the improvement in earnings outlook for many companies, particularly in the SME segment. "The improvement in their earnings are expected to translate into better returns for shareholders in the form of good dividend, capital appreciation and freebies like bonus shares" said an analyst with a leading Mumbai-based broking and investment banking firm.


   Some of the bonus-issuing companies have recorded a significant improvement in their performance, thus justifying their moves. Crompton Greaves has reported a 60% jump in net profit to Rs 135 crore while its sales grew 13% to Rs 1,224 crore during the quarter ended December 2009. Pidilite also showed a remarkable improvement in its performance, recording a healthy net profit growth of 158% at Rs 86 crore in quarter ended September 2009. Sales were up 5% at Rs 511 crore during the period.

 

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