Investing in EV Stocks: Should You Consider Bonus Shares?

Investing in electric vehicle (EV) stocks in India has become increasingly popular as the country transitions towards a more sustainable future. The burgeoning EV market offers an intriguing opportunity for investors seeking growth. However, when you’re looking at EV stocks to buy in India, one crucial aspect that requires consideration is the issuance of bonus shares. This article unravels the concept of bonus shares and deliberates their significance while investing in the Indian EV industry.

Understanding EV Stocks in India

Electric vehicle stocks represent companies involved in the production, development, distribution, and servicing of electric vehicles. India, aiming for a greener economy, supports various initiatives that have spurred the growth of the EV market. As of 2024, some popular EV stocks in India include companies like Tata Motors, Mahindra Electric, Hero Electric, and Ashok Leyland. These companies are at the forefront, leveraging government policies and burgeoning consumer interest to pivot towards EV production.

What are Bonus Shares?

Bonus shares are additional shares given to existing shareholders without any extra cost, based on the number of shares that the shareholder already owns. Companies often issue bonus shares to distribute accumulated profits which can’t be used for dividend payouts due to lack of sufficient cash flow. Instead, a company leverages these accumulated profits to reward shareholders by issuing bonus shares.

Example:

Consider a hypothetical situation where a company announces a 1:1 bonus share. This means for every share an investor holds, they will receive an additional share. Thus, if you own 100 shares of a particular EV stock, you would receive 100 additional shares, making it a total of 200 shares.

Why Do Companies Issue Bonus Shares?

Bonus shares play various roles in a company’s financial strategy:

1. Signaling Strong Performance: It indicates that the company is performing well and has substantial reserves.
2. Increased Share Liquidity: With more shares in the market, there is increased liquidity, making trading easier.
3. Psychological Impact: Shareholders often perceive bonus shares positively, seeing it as a reward, which can upscale market sentiment.

Financial Pros and Cons of Bonus Shares

Investors must weigh the pros and cons of bonus shares while contemplating investment in EV stocks to buy in India.

– Pros:

– No Extra Cost: Shareholders receive additional shares without spending more money.

– Share Price Adjustment: The price per share usually adjusts post-issuance, making it more affordable for small investors.

– Market Perception: Positive market perception due to bonus shares might drive the stock price upwards in the long run.

– Cons:

– Share Dilution: More shares in the market might lead to dilution of equity for existing shareholders.

– Short-term Volatility: Post-issuance, short-term volatility may increase as new shares flood the market.

Calculating the Impact on Share Price

When a company declares bonus shares, the price of the share adjusts in accordance with the ratio of the bonus. Let’s go through a calculation example:

Calculation Example:

If an EV stock is trading at INR 1,000 and the company announces a 1:1 bonus, post issuance, the number of shares would double, since each shareholder gets an additional share for every share held. Hence, the new share price would typically be:

While the share price halves, the overall value of the investment remains the same. Existing holders see two shares worth INR 500 each as opposed to one share worth INR 1,000.

Evaluating EV Stocks to Buy in India – Case in Point

To illustrate, let’s consider Tata Motors, which is a major player in the Indian EV market. Hypothetically, if Tata Motors announces a 1:1 bonus, and if its current stock price is INR 600, post bonus issue, the new adjusted price would be:

Suppose you hold 200 shares, worth INR 120,000 at the current price. Post bonus issue, you would own 400 shares. The value of your holdings would still be INR 120,000, with each share priced at INR 300.

How Should You Approach Bonus Shares?

Bonus shares are not directly impacting the fundamental value of the investment but do have implications for market perception and long-term growth. Here’s how to approach:

1. Company Fundamentals: Before considering an investment, evaluate the fundamentals and long-term potential of the company in the EV market.
2. Past Performance: Assess the company’s past performance, especially how well it has managed issuances of shares, including bonus shares.
3. Market Sentiment: Understand the market sentiment and trends in the EV sector as positive outlooks can boost growth potential.

Conclusion

Investing in EV stocks to buy in India is ripe with opportunities, especially as the country pivots towards sustainable mobility solutions. The issuance of bonus shares by these companies forms a significant consideration for investors aiming to maximize returns efficiently. Careful analysis of the implications of bonus shares on stock prices, company fundamentals, and market sentiments is imperative.

Disclaimer:

Investing in the stock market involves risks, and it is essential to conduct thorough research and consider all potential pros and cons before making investment decisions. The information provided in this article is intended for educational purposes and does not constitute financial advice. Kindly consult a financial advisor to gauge suitability according to individual financial goals and risk appetite.