Thursday, December 19, 2013

Rationalisation of Rules in Periodic Call Auctions for Illiquid Scrips

Today SEBI came out with revised guidelines for Periodic Call Auction (PCAS) in equity market (Here).

Lets discuss some stocks which may make a comeback in normal segment from PCAS segment.

But before that Please refer (here) to understand the changes in PCAS Segment.

I believe more than 65% of stocks(415) which are there in PCAS segment in NSE will come out and 50 % of the BSE stocks(2337).

NSE - National Stock Exchange of India Ltd.

I believe that there will be a new price discovery in quality stock which will come out of PCAS.

Some Major stocks which can come out of PCAS segment, and which may have positive impact on its price are 


The List is not exhaustive . Also Please note that may stocks which are out of PCAS can still be traded to trade to trade basis.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I don't have any positions in any of the stock mentioned above, except for Pioneer Distilleries Ltd.

Wednesday, December 18, 2013

Zee Entertainment : Reason for Backwardation ?

 Zee Entertainment is trading in Normal backwardation for Jan, 2014. 

ZEE Entertainment

The CMP is Rs 284.40  (Here)

In FO Dec 2013 Contract  286.00  (Here)
In FO Jan 2014  Contract  279.60   (Here)

It Implies a backwardation of almost Rs 6.00/-.   Why ?

This backwardation in stock lead me to think about the reasons of backwardation in this stock ?

The reason of this discounting was the expectation of Bonus Redeemable Preference Shares (RPS) (Here). The company has already declared RPS in may and market is expecting a go ahead from the court on 20th Dec, 2013. The date on which its case for issue of RPS is scheduled in Munbai High Court.

It seems logical that, If the court accepts the issue (In any case they will accept, it is the matter of time), the company can very well fix record date in Jan, 2014 and distribute the RPS. But Mumbai High Court Case no (CSPL/695/2013) has listed the matter as (Listed for Final hearing). Looking at past orders of other such cases in different courts, including Mumbai for such matters, I feel that court may have final hearing, but it may give a new date for final order (I have to admit, I am not a lawyer or have legal background, I am saying this based on my experience of analyzing mergers, acquisitions and takeovers of different companies, which also involves regulatory processes). The new date can be after few days or weeks, which may change the calculation of Ex- Date and hence the discounting.

Also I have a different view on adjustment of Corporate action on RPS by NSE on its derivative segment (Here) . It is perceived that since the face value of RPS is Rs 21/- , Which is less that 10 % of stock price of Rs 241/- (22 May, 2013). But I beg to differ that these RPS can be considered as dividend and benefit can be passed on in derivatives segment. Because Though the face value of RPS would be Rs 21/- (Rs1 * 21 RPS), But Its market value may be different because of different expectation of yield and duration of RPS. 

Based on above reason, The exchange may not reduce the amount as face value, but It may close all open position on eve of Ex date and issue fresh contract on Ex dates as in case of De- mergers. I again have to caution , that it is my view and exchange may look other way. Also there is precedence in past, where exchanged has looked the other way by giving the benefits as dividend (Issue by Bonus Debentures by Hindustan lever in 2003)

The Discount in Zee Entertainment, is because of perception and I have discussed the pro and Cons of such perception.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I intend to take position in derivative segment of this stock.

Monday, December 16, 2013

Special Situation : Foursoft Ltd

Recently Foursoft paid a dividend of Rs 29/- per share after selling  its business. (Here)

Four Soft

Further they have declared their intention to reduce the capital by 50 % by returning 29/- per share. (Here)

After Paying this amount, It will be left with at least Rs 25 crores, which comes to around Rs 13/-.

Today, If I buy the shares @ Rs 16.20/-, I will be entitle of Rs 29/- for 1 shares out of every 2 share , also the cash lying residual with the company will be Rs 13/-. Hence the composite cash lying with the company is at least Rs 21/- per share. 

I don't intend to give discount to cash in this case as Four Soft has successfully, proven to given to give full cash to share holders. For More Information Here

Based on above logic, I expect a return of at least 15 % in next 6 months.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I have taken position in stock.

Wednesday, October 30, 2013

Arbitrage Opportunity in NHPC

There is an interesting Low Risk Arbitrage Opportunity in NHPC, by virtue of it being in Derivatives segment.

NHPC has announced a buyback @19.25/- per share (CMP 18.10/-). There is a Tender offer for buyback. The Buyback is for 10% of the Equity, Wherein the Government has confirmed to tender shares in the buyback. The record date of determining eligible shareholders for buy-back is 8th Nov, 2013.

There will be buyback of 123 Crore Shares @ Rs 19.25/-

There are 2 level of Opportunity in the offer,

a) As per SEBI (Buy Back Regulation), 15% of the buyback in Tender offer has to be from retail investors. So Effectively they will have to buy 18.45 Crore share, effectively coming to acceptance ratio 30%, But the acceptance ratio in these category can be higher as most retail investors won't surrender the shares as their cost of acquisition would be much higher.

Effectively I expect an acceptance ratio of at least 60%. What about the price risk  ? That Risk can be hedged by selling the same quantity in futures market There is positive cost of carry.

Just a small caution, To be eligible as retail investor, you should hold not more than 10000 shares of NHPC on record date.

b) There lies opportunity for other investors also,  They can also tender the shares but the acceptance ratio will be not more than 10% to 12%. But the advantage is that you need not have to tender full quantity of shares buy only the eligible quantity. Effectively you can increase your acceptance ratio by creating position in Cash and selling them in futures in the ratio 1 lot against 11000 shares. Since the cost of carry is positive, you will earn interest.

Also you can reverse the position on any day after the record date to the extent of Short Quantity in Futures.

The taken to complete the buyback would be around 60 days to 75 days. 

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I have taken position in stock.

Saturday, May 18, 2013

TTML OFS : Is Management playing fool of Investors and Market ?

Yesterday, Tata Teleservice (Maharastra) Ltd (TTML) came out with an Offer of Sale (OFS) for selling 2.72% of the company, which comes to around 5.162 Crore shares (here)

 TATA Teleservices

The Key Points to note about the company are :

a) TTML is into providing mobile services in Maharastra and Goa. under the brand name Tata DOCOMO.

b) The Company has Negative net worth.

c)  The Company has outstanding Long term liabilities of Rs 5000 Crores, apart from negative working capital to the tune of Rs 2,000 Crores taken care by short term borrowings and payable.

d) The Market cap of the company as on 17th May, 2013 was almost Rs 1600 crores.

e) The company is making losses since many quarters, They have positive EBITDA, which is eroded completely by finance charges and Depreciation.

f) Financial Institutions merely hold 0.77 % in the company.

The Salient features of TTML OFS were :

a) The Base price of the OFS was not disclosed, It was disclosed only after the all the bids were received at various price points. They had time to submit the Base price by 2.00 pm on the day of OFS.

b) TTML took a relaxation from SEBI to reduce the cooling off period from 12 weeks to 3 days to launch another OFS, if the First OFS is not fully subscribed. I guess TTML would have taken the permission because they are aware that Financial institutions may not be interested in holding these shares and Retail Investors may have their own thought process.

c) The OFS was to be offered at multiple clearing price.

What Happened the then ?

a) OFS opened as planned and bids were collected to the 4.36 crores shares, with VWAP price of Rs 5.67. If we remove the outliers in the bids and we only consider bids up to 25% below the previous day closing price the bids were up to 50% of the book.

b) Then after the OFS was closed the sealed envelope of Base price was opened by exchanges and the BASE price was 8.90, Which was also the previous day closing price.

c) The came the circular that the OFS stands cancelled as bids received  were below the base price and also the book was not fully subscribed.

What Happened to Investors and Market ?

a) Since the Base price was to be declared after completion of OFS , people felt that there will be significant discount to market price to stocks (That is the norm in most OFS), people started applying in OFS and selling some part in cash market to book partial gains.

b) There was huge volume in the stock and as there were many sellers, there were also buyers in the stock (I am sure, apart from noise the buyers would also know that there is an OFS in the market and Base price is unknown)

c) Now with cancellation of OFS, we will find a spike in stock price and all shorts will have to cover their positions. The people who were buying of the day of OFS will make extra ordinary gains.

What are my concerns ?

a) In most of the cases the Base price of OFS is always below its current market price. but still TTML chose to price its OFS at previous day closing price.

b) The management took permission for follow on OFS, and also reducing the cooling off period. It means they had the perception that OFS would not be subscribed fully. Still they choose to price their OFS aggressively, after knowing that OFS may fail.

c) The management decided to keep the base price disclosed, if they were not ready to sell shares at a discount, but still conflicting signals were given to market about pricing. 

d) Is there a probability that the prices were hammered recently before the run up to OFS ? NO the price of these stock seems not fallen in recent past as 21 DMA 8.85 and 14 DMA was 8.72 , with the highest traded price in these financial year is Rs 9.40

e) Was the management expecting aggressive bids ? 99 % of the bids received were below the base price and Not a single shares were subscribed by any institution.

f) Who gained in these process ? Nobody except the buyers on Exchange on the day of OFS, They will have super normal profit in short run. The Tata were not able to sell their shares, Investors and liquidity providers and arbitrageur were in lurch. 

Conclusion :

a) Why would management create a secrecy around (In terms of Base Price) the OFS and then they have nothing to give.

b) The total size of OFS was only to the tune of Rs 40 Crores to Rs 45 Crores, buy still the Tata's were not able to place it with investors ?

c) Will they bring OFS again and then will the liquidity player and arbitrageur take calculated bets in TTML ? Would they not look at the OFS with suspicion ? and may expect more Risk Premium?

d) Is it an eyewash to SEBI , that We tried to place the shares but we were not able to offload it ???

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I had applied in OFS of these stock.