One price fits all

When shopping for fruit, you can get foxed by vendors selling apples of the same size and colour, at different prices. Investors face similar confusion when buying stocks.

Narayan Krishnamurthy and Devangshu Datta         Print Edition: December 13, 2007

When shopping for fruit, you can get foxed by vendors selling apples of the same size and colour, at different prices. Investors face similar confusion when buying stocks, due to the multiplicity of face values.

Face value is a concept that allows the equity base of companies to be split into a number of shares. A company can also change the face value of its stock. When making initial public offerings, companies set the face value and charge a premium. For example, in September, Power Grid Corporation set a face value of Rs 10 and issued shares at a premium of Rs 42 for a total price of Rs 52 per share.

As an investor, your problem is that you cannot directly compare stocks of different face values. A share of Rs 10 face value that is quoting at Rs 1,000 is actually priced lower than a share with Re 1 face value quoting at Rs 101. For each split or dividend payout, you need to pull out a calculator.

The Securities and Exchange Board of India is considering a proposal to impose a uniform face value of Re 1 for all listed shares. If implemented, here’s how it will change the basics of stock analysis:

Dividends: Dividends are traditionally shown as a per cent of face value. This is misleading. Consider, for instance, a company that has issued its share with a face value of Rs 2 for Rs 400 and announces a dividend of 100%. The subscriber pays Rs 400 and receives Rs 2 in dividend. His real effective dividend — what is called dividend yield — is a paltry 0.5%. Uniform face value will make dividends easy to calculate.

EPS: Earnings per share (net profit divided by number of shares) will change with the change in face value. If a company has an EPS of Rs 20 on shares of Rs 10 face value, the EPS becomes Rs 2 if the face value is reduced to Re 1. The number of shares increases 10 times. Share capital: The number of shares outstanding and the paid-up share capital will be the same if the face value is Re 1. This makes many calculations easy.

CHANGING FACES

StockFace valueMarket price*Adjusted price**
TCS1948948
Larsen & Toubro24,1082,054
Infosys Tech51,548309.60
Reliance Industries102,722272.20

*Market price (in Rs) as on 22 Nov ** If face value was Re 1

Stock splits and bonus issues: In a bonus issue, the company hands out accumulated profits (“reserves”) as new shares. In a stocksplit, only the face value is changed. If there is a uniform face value, stock splits can’t be done. This has one downside. Companies also split shares to impart liquidity when the share price becomes too high.

PE ratio: Since both price and EPS change by the same amount with a split, there is no change of PE if uniform face value is imposed. For instance say a Rs 10 share trades at Rs 1,000 and it has a P/E of 40 and EPS of Rs 25. At a face value of Rs 1, the price is Rs 100 and the EPS Rs 2.5. So the PE remains at 40.

Uniform pricing will similify things for investors but be ready for some confusion during the switch over. Companies with high share price may lose on liquidity as could their shareholders.

BSE POWER

ScripWeight in index (%) 
BHEL 21.2
NTPC 14.24
RELIANCE ENERGY 12.5
SUZLON ENERGY 9.12
ABB 7.98
TATA POWER 7.73
SIEMENS 7.29
CROMPTON GRE 4.64
POWER GRID 4.64
GMR INFRA 3.93
TORRENT POWER 2.06
GVK POWERINF 1.66
AREVA 1.53
CESC 1.49
Power packed

Investors already know that stocks of power companies have been posting the highest returns on investment. In fact, some mutual fund houses have even launched energy funds that invest primarily in the power sector.

All in all, whether you are a direct investor or have taken the MF route, you would have been exposed to power stocks, and benefited from them. What was lacking was a benchmark to judge the performance of these stocks. The recently launched power index by the BSE plugs that gap.

It comprises 14 scrips and is representative of 90% market capitalisation of the power sector companies from the BSE-500 list.

— Tanvi Varma

What's hot...

Whether you are an online shopper or a seller, you might be interested in keeping tabs on emerging trends. Last quarter, we featured the hottest selling items on eBay India.

Here’s an update. This time round, the uptake has been sluggish — jewellery sold every seven minutes compared to six minutes earlier. PC games are going slower too, one every 44 minutes compared to 36 minutes last quarter.

Jewellery: Sells every 7 minutesMobile handset: Sells every 15 minutesApparel: Sells every 13 minutesData storage: Sells every 18 minutesBook: Sells every 11 minutes
Stamp: Sells every 24 minutesCoin or note: Sells every 19 minutesPC game: Sells every 44 minutesWatch: Sells every 33 minutesMP3 player: Sells every 20 minutes

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