5% Dividend, 1:10 Stock Split: Multibagger Smallcap Defence Stock Falls On Warrant Allotment

The shares of Apollo Micro Systems (AMS) took a significant hit, dropping more than 5% to Rs 103.40 per share as of 3 pm on the National Stock Exchange (NSE) on June 4th, 2024. This decline came on the back of the company's announcement of a major allotment of warrants.

Apollo Micro Systems, a player in the electronics sector, faced investor concern following its latest financial manoeuvre. The company announced the allotment of a substantial number of warrants, a move that has raised eyebrows in the trading community. In a detailed filing with the NSE, the company disclosed the specifics of this financial strategy.

The company's statement read: "This is in furtherance to the intimation given by the Company on 5th December 2022 regarding the allotment of 98,85,070 warrants, each convertible into, or exchangeable for, one equity share of face value of Re. 10 each. Following shareholder approval for a subdivision of these shares, each warrant is now convertible into 10 equity shares of Re. 1 each, effective from May 4th, 2023. These warrants were issued at a price of Rs 186 each, which includes a warrant subscription price of Rs 46.50 and a warrant exercise price of Rs 139.50."

This large-scale issuance of warrants was directed towards 24 allottees, as detailed in the company's correspondence. This strategic move was part of a preferential basis allotment, a common practice that can sometimes lead to stock volatility due to the perceived dilution of existing shares.

The impact of this decision was immediate. The announcement coincided with the company's receipt of Rs 10,63,64,565 from warrant holders as the warrant exercise price. Following this, Apollo Micro Systems' Securities Allotment Committee approved the conversion of 76,24,700 warrants into equity shares of Re. 1 each. This conversion increased the company's issued and paid-up capital to Rs 30,64,89,560, distributed over 30,64,89,560 equity shares of Re. 1 each.

Despite the market's reaction, the company emphasized that the newly allotted equity shares would rank pari passu with the existing shares, implying equal footing in terms of dividends, voting rights, and other shareholder privileges.

For the fiscal year ending March 2024, Apollo Micro Systems declared a modest equity dividend of 5%, translating to Rs 0.05 per share. At the current share price of Rs 103.40, this results in a rather low dividend yield of 0.05%. However, it's noteworthy that AMS has a solid track record of consistent dividend payments over the last five years, reflecting stability and reliability in shareholder returns.

Apollo Micro Systems executed a share split in May 2023, reducing the face value from Rs 10 to Rs 1. This move made the stock more accessible to a broader base of investors, which is often a strategy to increase market participation and share trading volumes.

Despite the recent downturn, Apollo Micro Systems has shown stellar growth over the past years. The stock has delivered multibagger returns, with a nearly 200% increase over the last year and a staggering 800% surge over the last three years. The company's shares have fluctuated between a 52-week low of Rs 34.6 and a high of Rs 161.7, indicating significant volatility but also high growth potential.

The immediate negative reaction in the stock price suggests that investors are concerned about the potential dilution of their holdings following the warrant conversions. Dilution occurs when a company issues new shares, thereby reducing the ownership percentage of existing shareholders. However, if the capital raised through these warrants is utilized effectively for growth initiatives, it could lead to long-term value creation.

Market analysts suggest that while the short-term outlook may appear shaky due to dilution fears, the long-term prospects of Apollo Micro Systems remain robust, especially considering its historical performance and strategic initiatives. The company's consistent dividend history, substantial share price appreciation, and proactive corporate actions like share splits point towards a management team focused on growth and shareholder value.