Will the 5:1 bonus add value to Nykaa shareholders?

FSN E-Commerce, the online and offline fashion and lifestyle company founded by former investment banker Falguni Nayyar, has come up with the first big idea to impress its shareholders. The company, which is better known in the market by its brand name Nykaa, has declared a bonus in the ratio of 5:1. In other words, shareholders of Nykaa will get 5 shares for every 1 share held. In short, the shareholder holding 100 shares of Nykaa prior to the bonus record date would be holding 500 shares after the bonus. Of course the bonus move would be value neutral to the shareholders, but more on that later.

On Monday, 03rd October,  when the bonus was announced, the stock reacted very positively and rallied up to 11%. However, towards the end of the day, the stock had given up most of its gains. On Tuesday, the reaction is not too substantive as the stock is just up about 1.21% at mid-day. In terms of price performance, Nykaa is one of the few digital new age companies that is still trading above its IPO issue price off Rs1,125. However, the stock touched a high of Rs2,573 in the last one year and from that point the damage to the price has been in the vicinity of around 50%. That is a lot of value depletion post listing.

The company has fixed Thursday, November 03rd 2022 as the record date for the bonus issue. Investors must have the shares in their demat account by the evening of 03rd November to be eligible to receive the bonus shares. Since stocks operate in the T+2 rolling settlement format, 01st November will be the last cum-date to receive the bonus and only those investors who buy the shares latest by 01st November will be eligible to get these bonus shares. From 02nd November, the stock of Nykaa will trade ex-bonus i.e. the price would get adjusted for the bonus from the ex-date.

The board of the company has announced that the issuance of bonus shares will be made out of Securities Premium Account available as on March 31, 2022. That is obvious because the company does not have any substantial accumulated profits to pay bonus out of. The share premium was substantial since the IPO was made at a substantial premium to the par value of the stock. The IPO was made at the par value of Rs1 plus share premium of Rs1,124, taking the IPO price to Rs1,125. That premium is now being capitalized and paid out to the shareholders as bonus shares. Would this really add value to shareholders?

By definition, bonus issues are value neutral. In the sense, that bonus does not create any value accretion. The price of the stock normally falls in proportion to the increase in the number of shares. For instance, if you were holding 100 shares of Nykaa pre-bonus at the price of Rs1,300 per share, post bonus you would be holding 500 shares with an approximate market price of Rs260. However, the value addition could come from the reduction in the stock price, which brings it into the retail investor radar. Normally, that has acted as a price accelerator for companies post bonus issues.

The bonus shares are normally credited with 2 months of the date of board approval. Since the board approval is on 03rd October 2022, the bonus shares can be expected to be credited to the demat account latest by December 02nd 2022. This is normal statutory requirement, although the bonus credits are normally done even before that date. In addition, the company has also removed preference shares from its authorized capital. Its authorized capital changes from Rs275 crore equity plus Rs50 crore preference to just Rs325 crore of pure equity. This is subject to shareholder approval via postal ballot.

Nykaa was founded in 2012 by Falguni Nayar, a long time market veteran and former head of investment banking at Kotak Mahindra Capital. Nykaa offers a varied portfolio of beauty, personnel care and fashion products. It not only sells its own brands but also markets the marquee brands of other manufacturers. Like most digital new age plays, Nykaa has also lost 35% in the current calendar year and around 43% from the listing price. It is down a full 50% from the peak prices scaled. Hopefully, the stock should get some respite post the bonus issue.