Authorized share capital, Issued share capital, EPS and Diluted EPS

Vamsi had some excellent comments on yesterday’s post about rights issue, and I thought I’ll take those questions and create a full post based on them.

Essentially, the question was about the different terms used with respect to the capital structure of a company, and I’m going to write about a few terms that are used frequently while discussing share capital.

The first term is Authorized Share Capital, and this simply means the total number of shares that a company is allowed to issue. This is something that a company decides internally, and they can raise this limit (and they usually do) from time to time as the need arises.

When you read somewhere that a company has an Authorized Share Capital of say 237 million shares (like in the case of Religare Finvest) – there is not much you can make out by just that statement.

That’s because you need to know how many shares has the company actually issued out of its permissible limit of 237 million.

The number of shares it has issued is called Issued Share Capital, and this is the term that’s more important because this shows the number of shares that are currently issued by the company, and is also the number of outstanding shares of the company. In this case, the number of issued shares is 173,322,137, and that’s the number to look for.

A lot of you must be aware of the P/E ratio of a company, and that is calculated by dividing the market price of the share by the earnings per share.

But to calculate the earnings per share you need the total earnings, and the number of outstanding shares or issued shares. This is where the issued share capital is used. I see that Religare Finvest had a net profit of Rs. 1,147.75 million, and since we know that they have 173,322,137 shares – we can arrive at the Earnings Per Share by dividing 1147.75 million by the issued or outstanding shares to get an EPS of Rs. 6.62.

Yesterday I wrote about diluting of earnings and what I meant was if you issue new shares then this profit of Rs. 1,147.75 million will now be divided among those many more shares and the EPS available to each shareholder will be reduced.

The last term for today is Diluted EPS; very often you will see an EPS number, and then another number called Diluted EPS.

Diluted EPS is a term that is used to define EPS adjusted for future dilutions owing to stock options and other conversions like debt converted to equity.

Simply put, when a company issues stock options to its employees – the number of outstanding shares don’t increase immediately, but they will increase as the employees exercise their stock options. The diluted EPS takes this increased base into account and reduces the EPS to that extent.

The EPS may not completely dilute because not all employees may exercise their stock options and not all convertible bond holders may convert their debt to shares, but this calculation does give an idea of how low the EPS can go if everyone did so.

These are some common terms used with respect to the capital structure of a company, and the concepts themselves are quite simple if you don’t get lost in the maze of jargon.

What is a share rights issue and why all the fuss about it?

This is another post from the Suggest a Topic page, and this time we’re going to take a look at rights issues, and as the commenter put it – the fuss about them.

A rights issue is when a company issues new shares, but offers it to their existing shareholders first. The existing shareholders then have an option to either buy the new shares or pass the offer. So, recently when the SBI rights issue was in the news, it was often said that the government is willing to subscribe to the rights issue, and that’s because they own 59.4% of SBI, and if any shares are issued without the government participating in the offer then their shareholding in the company will come down.

This will be clear with an example, so let’s look at the latest rights issue – that of Velan Hotels Limited. They are issuing 2,67,35,500 (2.67 cr) new shares as part of the rights issue at Rs. 23 per share, and the ratio is 69:20.

69:20 means that for every 20 shares that you currently own – you can subscribe up to 69 new shares. The rationale for this seemingly weird allocation ratio will be clear in a minute.

The number of outstanding shares in the company before the rights issue were 77,50,000 and when you add the 2,67,35,500 new shares to the existing shares you get a total of 3,44,87,500 shares.

Equity shares prior to the issue  77,50,000.00
New Shares to be issued  2,67,37,500.00
Total shares after the issue  3,44,87,500.00

Now, when you divide the number of new shares to be issued (2,67,37,500) by the number of equity shares prior to the issue (77,50,000) you get 3.45.

Guess what you get when  you divide 69 by 20?

Exactly right – you get 3.45.

Now do you see where the weird ratio of 69:20 come from?

If the rights issue is offered in that ratio and if all existing shareholders subscribe fully to the rights issue then their ownership in the company will remain exactly the same as it was before the issue.

The issue of new shares doesn’t dilute their ownership in the company at all!

This will be clearer if we look at how the promoter stake changes in this issue with the rights issue, and what would have happened if there weren’t a rights issue, and a simple IPO to issue shares.

Before this issue, the promoters owned 56.35% of Velan Hotels, which means they had 43,67,426 shares in all.

Promoters own  43,67,426.00
Equity shares prior to the issue  77,50,000.00
Ownership Percentage 56.35%

Suppose this were a FPO or a fresh issue of shares, and the promoters didn’t subscribe to the fresh issue in the FPO. If that were to happen then the promoters will only own 12.66% of the company as seen from the numbers below.

Promoters Own  43,67,426.00
Total shares including the new ones  3,44,87,500.00
Ownership Percentage 12.66%

As you can see that would not be a good scenario for the promoters, and in fact other shareholders also. Their existing shareholding will be diluted by quite a bit.

However, the ratio of 69:20 means that the promoters by virtue of their 43,67,426 will have the option to buy 1,50,67,620 additional shares (43,67,426 x 3.45), and take the total shares they own to 1,94,35,046, which is 56.35% of the new total outstanding shares, and thus the rights issue doesn’t affect their ownership in the company at all.

Promoters Own  4,367,426.00
Additional shares they can buy (3.45 times current holding)  15,067,620
Total shares they own  19,435,046
Total number of shares after the issue 34487500
Promoter stake in the company after the rights issue 56.35%

The fuss is essentially about retaining the same ownership in the company even after the issue of fresh issue of shares.

For small shareholders – the issue of ownership control doesn’t arise, but the earnings per share will reduce since there are now more shares for the same earnings, and so will the dividends so whenever a company comes out with a rights issue you have to evaluate it to see whether it makes sense for you to subscribe or if you are better off with getting rid of the existing position or should you do nothing at all. Right now I’m unable to think of any factors that need to be considered apart from of course the financial situation of the company, and the price at which the rights issue is being offered but if we ever discuss a live rights issue in the future, we will weigh in on those factors then.

The last thing about subscribing to the rights issue is that you can choose to subscribe to all of the shares you are eligible for, or a part of them. If you don’t do anything then no new shares will be subscribed to you.

The procedure to apply for new shares is that they send in a form to your address, and you have to fill in your details and submit that form to a collection center before the last date. You have to follow this process even if you do everything else online – to the best of my knowledge this process hasn’t been made online yet.

So, to summarize, rights issue is when a company issues fresh shares, but offers them to their existing shareholders in a pre determined ratio first. The existing shareholders can subscribe to these shares, and that helps them own the company in the same percentage that they did prior to the fresh issue.

 

Dividend yields of the top 100 shares in India

The volatility that the American indices saw in August brought forth a flurry of articles about great dividend stocks, and I read a number of articles about large American companies like Intel, Pfizer, Johnson & Johnson, Vodafone, Astra Zeneca, Verizon etc. that give great dividend yields.

There are several large US companies that give dividend yields in excess of 3%, and that’s quite remarkable considering the fact that the fixed deposits in American banks fetch next to nothing.

I was curious to see if there are any large Indian companies that offer such great dividend yields. I went to the BSE website, and took a look at the dividend payouts in the last financial year (April 1 2010 – March 31 2011), and the current market price to calculate the dividend yields of the 100 biggest companies in the BSE 500.

Although there aren’t many very high yielding dividend stocks there are 23 which give dividend yields in excess of 2%. Let me share that subset with you first.

S.No. Stock Dividend Paid Market Price Dividend Yield Notes
1 Hero Motors 110 2067 5.32 Interim Div on 15 April 2010 – Rs. 80 & final dividend on Sep 1 2010 Rs. 30
2 ITC Limited 5 203 2.46 Bonus of 1:1 so dividend is considered as Rs. 5 instead of Rs. 10
3 Bajaj Holdings 30 747 4.02
4 PFC 5 147 3.40
5 HPCL 12 379.55 3.16
6 ONGC 8 264 3.03 Stock split from 10 to 5 & then bonus 1:1 – original dividend was Rs. 32
7 ACC 30.5 1011 3.02 Includes special dividend of Rs.7.50
8 IOC 9.5 317 3.00
9 GSK Consumer Healthcare 68 2340 2.91 Includes special dividend of Rs. 25
10 SAIL 2.9 109 2.66
11 Oil India 34 1300 2.62
12 Tata Chem 9 355 2.54
13 PNB 22 912 2.41
14 Canara Bank 10 420 2.38
15 Union Bank 5.5 236 2.33
16 NHPC 0.55 24 2.29
17 NTPC 3.8 166.9 2.28
18 Bank of India 7 312 2.24
19 Cummins 13 614 2.12
20 BoB 15 728 2.06
21 REC Ltd 3.5 170 2.06
22 BPCL 14 682 2.05
23 Power Grid 2 99.5 2.01

As you can see I’ve tried to record special events like bonuses, splits, special dividends etc. wherever I noticed them as that makes a difference in calculating yields. This is because I’m using the current market price whereas the dividends were paid out in the last financial year, and the number of outstanding shares may be different due to these actions.

Now, here is the complete list.

Stock Dividend Paid Market Price Dividend Yield Notes
Reliance Industries 7 804 0.87
Infosys 15 2315 0.65
ITC Limited 5 203 2.46 Bonus of 1:1 so dividend has been considered 5 instead of 10
ICICI Bank 12 887 1.35
HDFC 660 0.00
L&T 12.5 1609 0.78
HDFC Bank 2.4 471 0.51 Stock split from 10 to 2, so dividend has been considered as Rs. 2.4 instead of Rs. 12
TCS 6 1021 0.59
SBI 20 1993 1.00
Bharti 1 408 0.25
ONGC 8 264 3.03 Stock split from 10 to 5 & then bonus 1:1 – original dividend was Rs. 32
M&M 9.5 766 1.24
HUL 3.5 320 1.09
Tata Steel 8 488 1.64
BHEL 17.9 1737 1.03
Axis Bank 12 1076 1.12
Tata Motors 15 755 1.99
NTPC 3.8 166.9 2.28
Coal India 0.4 386.9 0.10
Bajaj Auto 20 1623 1.23 Bonus 1:1
Jindal Steel 1.25 525.5 0.24
GAIL India 7.5 414 1.81
Sun Pharma 2.75 505 0.54 Stock split from Rs. 5 to Rs. 1
Hindalco 1.35 154 0.88
Hero Motors 110 2067 5.32 Interim Div on 15 April 2010 – Rs. 80 & final dividend on Sep 1 2010 Rs. 30
Wipro 6 334 1.80 Interim and final div of 6.00 is considered
Sterlite Industries 0.9375 133 0.70
Dr. Reddy’s 11.25 1509 0.75
Kotak Bank 0.425 442 0.10 Stock split from 10 to 5, original dividend Rs. 0.85
Nestle 21.5 4470 0.48
Tata Power 1.2 1021 0.12 Stock split from 10 to 1 original dividend is Rs. 12
Power Grid 2 99.5 2.01
Maruti 6 1081 0.56
Asian Paints 23.5 3252 0.72 Declared on 11 June 2011
Adani Enterprises 2 531 0.38
Cipla 2.8 280 1.00
Grasim Inds 30 2167 1.38
IDFC 1.5 110 1.36
PNB 22 912 2.41
BoB 15 728 2.06
Ultratech Cement 6 1114 0.54
Lupin 3 467 0.64
HCL Tech 3 397 0.76
Cairn 284 0.00
Ambuja Cem 2.6 135 1.93
BPCL 14 682 2.05
ACC 30.5 1011 3.02 Includes special dividend of Rs.7.50
Indus Ind Bank 1.8 252 0.71
Titan 1.25 210 0.60
STFC 4 672 0.60
GSK 40 2137 1.87
Sesa Goa 3.25 231 1.41
DLF 2 208 0.96
NMDC 2.15 221 0.97
Idea 100 0.00
United Spirits 2.5 893 0.28
Ranbaxy 2 478 0.42
JSW Steel 9.5 720 1.32
Mundra Ports 0.5 157 0.32
IOC 9.5 317 3.00
Siemens 5 870 0.57
Jaiprakash 0.94 61.85 1.52
Zee 2 117 1.71
Exide 1.3 147 0.88
Bosch 30 7232 0.41 This year they have declared Rs. 125 as dividends so far
Dabur 0.65 112 0.58
Yes Bank 1.5 278 0.54
SAIL 2.9 109 2.66
LIC Housing Finance 3.5 216 1.62
Colgate 5 979 0.51
Reliance Infra 7.1 451 1.57
Canara Bank 10 420 2.38
HPCL 12 379.55 3.16
Federal Bank 5 366 1.37
Rel Com 0.85 84 1.01
Cummins 13 614 2.12
Tata Chem 9 355 2.54
Bank of India 7 312 2.24
REC Ltd 3.5 170 2.06
GSK Consumer Healthcare 68 2340 2.91 Includes special dividend of Rs. 25
PFC 5 147 3.40
Adani Power 88 0.00
Crompton Greaves 0.8 150 0.53
Union Bank 5.5 236 2.33
Hindustan Zinc 1 131 0.76
Aditya Birla Nuvo 5 914 0.55
Cadila Healthcare 5 830 0.60
United Phosphorus 2 146 1.37
Reliance Capital 6.5 406 1.60
Bajaj Holdings 30 747 4.02
Container Corporation 15.5 940 1.65
Divi’s Labs 6 729 0.82
Jain Irrigation 1 174 0.57
Glenmark 0.4 323 0.12
Godrej Consumers 2 422 0.47
Reliance Power 84 0.00
Oil India 34 1300 2.62
Petronet 1.75 177 0.99
ABB 2 857 0.23
NHPC 0.55 24 2.29

This was a very time consuming exercise and I’ve tried to be as accurate as possible, however there is always a possibility of errors in compiling such data, so please let me know if you spot anything, and I’ll correct it.

I’m going to try to do a similar list for small cap stocks and see if the yields are better there, and that post will probably be up next week.

Update: Tata Motors to include the whole Rs. 15 from last financial year as Ashok has pointed out.

Cancer sniffing dogs, new species of sharks and wooden iPads

Before I start this week I want to say that I’ve shared a lot of these over Twitter and Facebook already, so I’m sorry about the repetition that some of you may see. It’s just that I think that there are a lot more email subscribers so it outweighs the repetition that some of you may see.

But in any case, I’ll start off with a link that I haven’t yet shared – this is about dogs that can detect cancer just by sniffing a person’s breath. I was quite fascinated by the idea, and the article said that there have been earlier cases of dogs sniffing out cancer as well, but scientists are still some time away before turning it into a process that can be used at a scale.

Next up, scientists discover a new species of shark in a fish market in Taiwan! Apparently, this happens a lot more than you would imagine. Quite interesting!

Now, moving on to the economy – I enjoyed this piece in the NYT titled India measures itself against a China that doesn’t notice. The story talks about how Indians talk “endlessly” about China, but how India finds very little mention in China. That’s not really surprising, and is human behavior at all levels.

Talking of human behavior – Ranjan Varma writes about Psychology and Education and wonders why there is so much difference between rational decisions and automatic financial behavior.

I don’t know why that is, but thinking rationally for a few minutes would have saved this woman $180 who bought a wooden iPad from a McDonald’s parking lot.

Aditya shared this interesting article about speculation in food commodities and its impact on far flung places.

Finally, Hemant on understanding gears in investment vehicles.

Enjoy your weekend!

India’s Foreign Trade – April to July 2011

I’ve been looking at the monthly foreign trade numbers for quite some time now and there are three things that are more or less consistent every month. These have become a consistent feature of India’s numbers, and it’s a good idea to be aware of them.

The first thing is the huge rise year over year. Numbers are declared for every month, and usually they represent a huge jump over the same month in the previous year. In July 2011 – exports grew by 81.79% and imports grew by 51.52%.

If you look at the growth figures for the 4 months from April to July then the numbers are slightly lower (but still quite high) at an export growth of 53.98% and import growth of 40%.

This brings me to the second point – trade deficit.

Exports may have been growing faster than imports but who knows when India will run a trade surplus?

While a lot of our Asian neighbors have grown using the export route – I couldn’t find any data about an Indian trade surplus – not at least in this decade.

I think it’s very interesting that the huge diaspora abroad remits money, and in some ways make up for the lack of exports, but surely, we want to run a trade surplus at some point?

India Foreign Trade April to July 2011
India Foreign Trade April to July 2011

The third thing is how much of the imports are oil imports. This is no surprise, and if you want growth you need oil – there is no denying that, but the huge oil bill makes you wonder if fast enough progress is being made in trying to produce oil domestically.

According to this DNA article – India’s domestic oil production is 715,000 barrels per day, whereas its consumption is 2.6 million barrels per day. That means about 27.5% of the oil consumed is produced domestically.

That article was about Cairn developing their new finds in Rajasthan and that’s expected to raise production there to 350,000 barrels per day from the current 125,000 barrels per day.

So there are ways to increase the domestic oil production, and that not only helps reducing the trade deficit but reduce the oil bill and bring down inflation as well.

I feel that it’s inevitable that domestic oil production increases with time, but what’s not so certain is that it keeps pace with the growth in demand. And it’s not clear what will spur the next big push in exports; which areas can India focus on as far as the next big export push is concerned. It seems that it should be in manufacturing, but then which niche in manufacturing?

Disinvestment IPOs in India in 2011 – 12

I read the press release on the disinvestment of BHEL today, and thought of creating a list of all disinvestment IPO candidates in India this year. In the past we have seen that these IPOs are bunched together ,and it isn’t till very close to the IPO when they really start appearing in the news.

So far this year only the PFC FPO has taken place, and that means there is still a long way to go if the government wants to meet its target of Rs. 40,000 crores (unrealistic now).

This list will keep all the disinvestment candidates at one place, and will hopefully be updated many days before the IPO opens. I also want to track the performance of each of these IPOs to take a look at the end of the financial year to see how they fared. The performance of all IPOs last year wasn’t good, and it will be interesting to see if the trend changes this time.

With that said, here is a list of all companies that I know of that hope to see disinvestment IPOs this year.

S.No. Name Issue Size Open Date Close Date Issue Price Listing Date Listing Price Gain / Loss
1 BHEL              
2 National Building Construction Corporation              
3 NALCO              
4 ONGC              
5 SAIL              
6 Hindustan Copper              
7 Visakha Steel Plant              
8 MMTC              
9 Scooters India Ltd Possible strategic sale            
10 Indian Oil Corporation              
11 HMT Bearings Possible strategic sale            
12 PFC IPO Rs. 4,650 cr. May 10 2011 May 13 2011 Rs. 203 Already listed since it was an FPO Already listed since it was an FPO