India's largest bank in terms of market value, HDFC Bank, has declared its first-ever bonus issue. The ratio is 1:1. Simply put, HDFC Bank will give 1 free share for every 1 equity share. The sound of 'FREE' is always music to the ear. But does a bonus issue increase the wealth of investors?
What Is a Bonus Issue?
Let's understand a few factors of bonus issues, as per the market regulator Sebi guidelines:
First, a bonus issue can be announced by any listed company. The bonus is declared in a certain proportion only to the existing shareholders. The investor is not required to pay any extra money for these bonus shares. Meaning, bonuses are free of cost.
A listed company pays a bonus through its free reserves and surplus.
HDFC Bank Bonus Issue:
Last week, HDFC Bank announced its ever bonus issue of 1:1. So, HDFC Bank will give 1 free share with a face value of Re 1, on every existing 1 share with a face value of Re 1.
For this, the lender will allot at least 766,79,13,646 equity shares as bonus, amounting to Rs. 766,79,13,646/-. This amount will be taken out from HDFC Bank's free reserves.
But does HDFC Bank's bonus issue increase an investor's wealth?
The effects of bonus issues are:
- Increases the number of outstanding equity shares
- Reduces share price in proportion to the number of bonus shares issued.
- Reduces free reserves and surplus of the company.
- Creates implicit value per equity share.
- Increases liquidity in the equity shares on the stock exchanges.
- Reduces per share ratios such as earnings per share, or book value per share, among others.
Let's say you held 100 shares of HDFC Bank at Rs 2,000 each. Assuming no market reaction on the bonus record date, at a 1:1 bonus issue ratio, you will receive 100 free shares (100 existing shares x 1/1), which will take your total number of shares to 200 shares, but the share price value will be reduced to Rs 1,000 each. So theoretically, there is no surge or fall in your portfolio; your wealth remains the same.
Furthermore, the earnings per share will decline due to bonus issue adjustments. Example: If the company earned Rs 200 crore and holds 200 shares pre-bonus, its earnings per share will be Rs 1. Assuming profits are unchanged, post bonus issue, at a 1:1 ratio, the company will have 400 shares, but its EPS will be Rs 0.5. Hence, no increase in wealth.
Is a Bonus Issue Good For Investors?
Receiving bonus shares offers several advantages, both tangible and intangible, as per Jainam Broking's earlier blog. These are:
Increase in Shareholding: With more shares in your portfolio, your ownership stake in the company grows.
Enhanced Liquidity: By issuing bonus shares, companies improve the liquidity of their stock, making it easier to trade.
Sign of Financial Health: A bonus announcement often reflects the company's strong financial performance and surplus reserves.
Psychological Boost: Bonus shares often create positive sentiment among investors, which can lead to higher stock demand.
Jainam's blog said, "It's important to note, however, that while the number of shares increases, the stock's price typically adjusts proportionally, leaving the total investment value unchanged in the short term."
Does HDFC Bank's Bonus Passes Warren Buffett's Checklist?
Warren Buffett needs no introduction. He is the market guru, the famous 'Oracle of Omaha', and a great example for both experts and investors who are looking for profitable gains in the stock market. Buffett holds many stocks that have undergone stock splits and issued both dividends and bonuses. His Berkshire Hathaway Class B shares have also undergone one stock split in the ratio of 1:50 in 2010. But there is one stock that he holds, has never undergone either a split or a bonus.
It is none other than Berkshire Hathaway's Class A shares. Currently, the Class A stock is at $725,619. In Indian rupees, that is Rs 6.27 crore per share. Yes, you have read it right, Berkshire's Class A per share is at Rs 6,27,50,660.38 at the current market price in USD.
Berkshire Class A shares' all-time gains are 34,861.45%. The stock was $2,075 per piece on July 26, 1985. Since then, it has only grown impressively. The highest level touched by Berkshire Class A was $8,12,855 per share, which is Rs 7.03 crore per share in Indian rupees.
According to a Value Research report, Buffett's reasoning is straightforward: investors should focus on the underlying business, not the number of shares they own. By keeping the share count tight and price high, Buffett discourages speculative trading and attracts long-term investors who care about growth, not gimmicks.
When do you see fresh gains due to a bonus issue? If a company has strong fundamentals and commands a strong brand quality, the chances of fruitful fresh gains are high in the long term. HDFC Bank is the leader in the banking sector. And while a bonus issue is attractive, it will not create an immediate jump in the wealth of investors. However, it would be HDFC Bank's fundamentals and business performance ahead that will nudge the bulls or bears in its stock price in the future.
So should you invest in HDFC Bank?
Experts are bullish on HDFC Bank!
Global brokerages love HDFC Bank shares. CLSA, Goldman Sachs, Nomura and Jefferies have recommended BUY.
Goldman has maintained an 'OUTPERFORM' rating on HDFC Bank with a target price of Rs 2,327. CLSA also gives a similar rating while raising the target price to Rs 2,300 from Rs 2,200. Also, Nomura raised its target to Rs 2,190 from Rs 2,140. Brokerages' positive sentiment comes after HDFC Bank reported better-than-expected Q1 results.
Analysts at ICICI Securities said, "The share of borrowings and LDR continues to improve. Management reiterated its guidance of loan growth rising closer to system for FY26 and above system for FY27. HDFCB remains a beneficiary of sustained surplus systemic liquidity, in our view. The Board has approved an interim dividend of INR 5 and 1:1 bonus. Maintain BUY with an unchanged TP of INR 2,350."
Disclaimer: The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.
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