Update of HOVS Limited

Further to my Blog on HOVS Limited (here)

I have in past commented on developments of HOVS Limited. Now again further developments are happening in the company with regards to sale of their overseas investment SourceHOV LLC.

To refresh, Hovs Limited has a 100 % overseas subsidiary, which in turn has an equity stake of 27.20 % in SourceHOV LLC. The major shareholder in SourceHOV is Citi Venture Capital International (CVCI) to the tune of 65%. Hovs and CITI both were trying to sell its investment with an asking price of $1.20 billion. 

The asking price of SourceHov, converts to a big value for shareholders of Hovs Limited We will try to understand now what the shareholders of Hovs Ltd will garner. (do visit my previous article to know the background in details)

On 29th September, Hovs Limited said that (Here), (Here). The gist of the filings were :

a) On 3rd April, 2014. HGM, The fund promoted by the promoters had bought a company in US, named BancTec Inc (Here),(Here) The price of these acquisition was not known.

b) The on 29th Sep, These fund and the SourceHov reached a merger agreement where Banctec Inc will be merged with SourceHov LLC.

We don't have any valuation for either companies, to do analysis of pricing.

c) Also Hovs Ltd said, It will hold a Board meeting on 30th September to consider transaction relating to its wholly owned subsidiary.

On 1st Oct, 2014, The company made a release to Stock Exchange regarding the outcome of board meeting (Here), The major takeaways of the filings are :

a)  The Promoters themselves intend to buy the company SourceHov LLC, with the help of its fund Handson Fund 4 LLC (HOF4).

b) The company holds 26.1% in SourceHov LLC.

c) They mentioned that, They have offered to buy other major shareholder also, The major is CVCI.

d) The minimum sale price would be $ 95 million, converting the share value of the company at $ 363 million.

e) The money received by the company from the sale of asset will be used towards paying dividends and also making further investments in current Indian business.

f) Banctec will be merged with SourceHov LLC.

g) The valuation of merger was done by M/s PKF Shridhar and Santhanam Chartered Accountants, whereas Keynote corporate Services limited arrived at the valuation report of merger between SourceHov LLC and Banctec Inc.

h) The promoters would abstain from voting on resolution for sale of investment. As It will be a related partytransaction.

The Current market cap of company is (@cmp 152/-) Rs 190 Crores, whereas the amount expected from sale of SourceHov LLC would be minimum Rs 570 Crores. From the above offer of the promoters, The value per shares that can be fetched to Shareholders of Hovs Ltd will be almost Rs 455/-, If I reduce the Taxes to be paid, It will still come to Rs 364/- (@20% Tax). HUGE, It also has its BPO and KPO business in India.

But I have to make some critical comments on these development to help us take conscious investment decisions.

a) Previously the stake of Hovs Limited in Source HOV was 27.20 % , which now the company says is 26.1%.  The only rationale which I can think of for reduction in stake could be issue of ESOP to employees of SourceHOV LLC. But only the promoters can confirm these.

b) The company has said that the offer to buy is there from HOF4, They will also try to get offers from others and the offer is made to buy from others major shareholders also, the other major shareholder is CVCI. Here we can take solace that the valuation sought by CVCI will be a good price as they are not the related parties and the final deal price can be more than $95 mil for Hovs Ltd as buyers will have to match price to all sellers.

c) The asking price of SourceHov in the past was at enterprise value of $1.20 billion and they had around $650 million of Debt, So the equity value of the company may come to around $550 million. whereas the the promoters are now putting the price of $363 million. I guess final price would be more than $363 million as negotiations may be going on with other shareholders and the promoters may not be willing to disclose the final price which they are ready to pay. Also such low valuation price of SourceHov may put psychological pressure on sellers regarding the right value.

d) The valuation done on merger of Bantec with SourceHov was by M/s PKF Shridhar and Santhanam Chartered Accountants, who are based in India, whereas both the companies are based in Nevada, USA. The background of the firm is (Here). Same goes with Keynote Corporate Service who has worked on merger ratio. I guess they may have competencies, but they are based and operate only in India, I guess the reports are just a formal document for compliance. I guess the promoter should have taken these reports from professional who have vast exposure in such international deals. I am also surprised the CVCI accepted such report. Since they are the major shareholder in SourceHov.

Also no data is there in public domain regarding the price at which Banctec was bought, Balance Sheet of SourceHOV, Balance Sheet of Banctec. I am not able to understand about the data shared by Promoters of HOV to these professional and Also What additional data they may have sought ?

e) The promoters have agreed to not participate in  voting process for sale of SourceHov by the shareholders of Hovs Limited. But there are also some minority shareholders in Hovs Limited who are also connected to Promoter, Hondson3 and HGM and maybe Hof4. Some also happen to be related to promoters and their funds in the past. (Here), (Here), (Here). Not sure if all of them will participate in voting process and how many are allowed ?

g) The Promoters are trying to buy established business from listed entity, The listed entity Hovs Limited does not have huge dedt in its books , It has total liability of Rs 16 crores on consolidated basis as on 31 st March, 2014. (Here) , Hence we can infer that Company was not in need to sell the asset but the promoters wanted to buy it. Hence promoter should now come with clear information on How the proceeds will be used and in what proportion. The promoters have no right to keep the money for further use as they themselves are buying the assets and they have their own established funds for new business opportunity.

The promoter will have to give big divided, at least 70 % to 80 % of the proceeds, and they should declare such intention before the voting. Investor then may definitely support their resolution. Also not in near past have they said about requirement of funds in current business nor have they availed any credit limits.

h) Will SEBI look in this case as no data of transaction is available in public domain, It is also related party transaction, Also some major shareholders can be termed as related party. There is no clarity on deployment of funds.

From the above discussion, We can infer that 

a) The company can get more that Rs 360/- per share as base case and there are high probabilities of much higher price.

b) There will be a expectation and demand for a  big special dividend to the tune of not less than Rs 250/- to Rs 300 /- and I am sure company can..

c) We need to have more clarity of Investments in current business

d) The Promoters should come out with further details on this transaction as part of better corporate governance.

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

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased.

Dechiphering India VIX valuation : Part III

Hello Friends,

I am discussing some finer points which comes in play for valuing India VIX. I should have spoken about finer points in my first part, But what I believe, At this juncture all of us are more interested to play around election results So at the onset, But the points I will discuss now should help you for longer time.

Before We proceed, You can also look at previous post on this topic (Here), (Here), (Here).

Some characteristics which goes in to making of India VIX are

a) VIX consist of 2 Implied Volatility (IV), They are for near month and next month. The IV are interpolated to arrive at VIX.

b) As Time Passes the weightage of Next month goes on increasing, and Near month goes on decreasing.

c) All out of money calls and puts are taken into consideration.

d) The calculation of VIX is not done on traded prices but only on Bid - Ask Quotes.It is an average of Bid- Ask Quote. No matter if the trade does not take place. The only caveat is that the spread between bid and ask should not be more than 30%. (It is just to avoid distortion in prices due to high bid - ask spread.) Suck condition is not there on CBOE VIX as the market is more mature over there.

e) If a Bid - Ask spread of a strike is below 30 %, All OTM strikes above that strike in case of Put and All strikes below that identified call are taken into calculation for VIX.

So if today 5000 P has a bid-ask spread of less than 30 %, then all strikes from 5000 and above upto 6700 will be considered for calculation, similarly IF less than 30 % spread is true for 8000 call, then all call from 8000 call to below 6700 call will be considered for VIX (Current Nifty is around 6700).

Also It does not matter is in above example 5150 P may not have Bid - Ask spread of 30 %, Than also it will be considered as the strike below it is already considered.

f) Once all strikes are identified, The price of each OTM call and put is taken. But if some strikes which are identified for calculation have bid - ask spread of more that 30 %, then a fair value for that strike is arrived using statical tools.

Hence all OTM strikes will have a fair value or a value generated using bid - ask.

g) Using all these data point, Volatility for each moth is generated and , the Final VIX is arrived.

Some Specific Insight for VIX

a) Higher the number of strikes and the distance from the current Price of Nifty, Higher will be the VIX, Because VIX takes into consideration all OTM calls / Puts and Every value of strikes are taken. No matter its impact goes on reducing as strikes becomes deep out of money, but there are marginal effect and with VIX trading upto 2 digits of VIX value, It can be huge.

b) Puts and also Deep Out of the money puts contribute more in calculation of VIX, compared to calls.

c)  Typically, 80 % of the value is contributed by 3 -4 strikes, which are near the money, the rest is by other OTM calls and Puts.

d)  In cases of higher IV for At the money Strikes (ATM Strikes) Eg: IV of more than 30 % , The VIX tend to be comparatively lower than ATM IV and vice- Versa.

e) IV of Near month is not considered, for last 3 days of expiry and the VIX is calculated using 2nd and 3rd month Nifty IV.

Some Statistical loophole which I could identify in India VIX :

a) I can rig VIX by few points by only giving bids and ask at the lowest Strike of Put of Nifty.

For Example Yesterday, 2700 P of Nifty June got active in VIX calculation and the price of VIX shot upto 0.50 points, which is 50Rs of VIX (Huge)

b) There will be calculation error in VIX for first 5 days of the starting of new Expiry, if The Expiry is of 35 days. Beware of that, Try to look for prices for 5th day only.

I will take an example here, For month ending 29th May, 2014 which is of 35 day, The first day for calculation of VIX will be from 23rd April as near month, (3 days before expiry ie Tru, Wed AND Tue.)

Again if on Thu or Wed or Tue happens to be a holiday as per above example the Prices on Tuesday will be distorted heavily, as it happened on 22april. Beware of such prices.

I will end here by saying that value of VIX can be arrived at using underlying IV, But It cannot be replicated. and There is also some ingredient of expectation inbuilt in VIX, which cannot be valued

I have tried to use simple words and no statistical jargon for readers.

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 taking position in VIX.

Dechiphering India VIX valuation in this Election Mania : Part II

Hello Friends,

In these second part of my writing on VIX, I will cover VIX Pricing and Post Poll Scenarios and How VIX could react..

Before We start please find my previous writing on VIX (Here), (Here)  for your perusal.

Below are the prices of VIX futures as on 2nd may, 2014.

Instrument	Symbol	Expiry Date	LTP
Vol. Futures	INDIAVIX	06-May-14	3363
Vol. Futures	INDIAVIX	13-May-14	3440
Vol. Futures	INDIAVIX	20-May-14	2323.75

From the prices we can see that 20, May futures is quoting at a steep discount to spot VIX. What could be the reason for such steep Discount.

a) Once the election results are out, the uncertainty will be over, and so the volatility will fall, also the Implied Volatility(IV) will fall and Since IV will fall, VIX will also fall. 

b) One more reason of Discount of VIX is because of pricing, Current month IV is quoting at around 34% and June IV is  25% and because of the make in VIX, as time passes, higher weightage will be given to 2nd month IV and since June IV is below May IV, VIX will tend to fall.

First lets see the price of VIX on 20 may, based on IV on May and June Nifty on 20th May.

May IV	June IV	VIX	Weightage of June IV
34%	25%	25.82	87.01%
fall in IV
30%	25%	25.78	86.96%
29%	24%	24.41	89.41%
28%	23%	23.41	89.27%
27%	22%	22.41	89.12%
26%	21%	21.42	88.95%
25%	20%	20.42	88.76%
25%	19%	19.51	87.69%
if moves up
38%	26%	27.09	85.24%
39%	27%	28.08	85.53%
40%	28%	29.07	85.80%
40%	29%	29.97	86.64%
40%	30%	30.86	87.40%

From the above scenario we can see that IV are expected to fall, hence VIX will fall, But life is full of uncertainties, We are also showing the pricing if the IV move up after the election results and The Election outcome is not as per expectation.

Please understand that These scenarios are only for election season and during normal times there will be many other things to look in to VIX.

In Next part I will write on characteristics of VIX, Also some Pit falls and I have also discovered some distortion in India VIX pricing in some scenarios. Which I will share.

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 taking position in VIX.

Dechiphering India VIX valuation in this Election Mania : Part I

Hello Friends,

I am writing this blog to familiarise you with perceived values of VIX around election time, Also I will try to bust some myths on VIX , Highlight Some characteristics in India VIX and I will try to also highlight some distortion in VIX calculations by NSE.

This will be a long write up and Hence I will break it in 3 Parts.

VIX refers to perceived Volatility for next 30 days. But In recent days to the Run up of Election results we discovered that VIX futures has jumped from around 1300/- to 4000/- and now quoting at around 3300/-.

There is huge volatility in this futures and also there lies lack of idea about pricing of VIX to common public.

If we look at VIX futures, Near week and 2nd Week VIX futures are quoting at premium and far week futures is quoting at a steep Discount.

Instrument	Symbol	Expiry Date	LTP
Vol. Futures	INDIAVIX	06-May-14	3363
Vol. Futures	INDIAVIX	13-May-14	3440
Vol. Futures	INDIAVIX	20-May-14	2323.75

Please read my previous blog  (Here) on VIX for basics.

We can see 13, May Futures quoting at 3440/- and 20th May Futures quoting at 2323.75/-, which is at a steep discount ? I am sure we all know that Election results in India are on 16th May, So The volatility will be high before the election and than It should fall after the election results

VIX is calculated using  2 months Out-of-Money Options Implied Volatility (IV) and as days pass, Next month IV starts getting higher weightage in VIX and Near Month IV. So if you may think that VIX will go up before election, but the Question is " How up VIX can go before Election ?"

I don't have that answer, But what I can help you with is scenario analysis for valuation of VIX. The value of  VIX on or after 16 may will be based on election results, But 13th May contract is also important because There will be buildup of expectation of Election outcome which will be priced in the IV. Also the Exit Polls will be out on 12, May evening.

As Discussed VIX is calculate using 2 months IV, Calculating composite IV of all OTM calls and Puts is tedious process and not easy to compute, so for simplicity you can take approx IV of 3 strikes of OTM calls and Puts of Nifty. (Beware There are pitfalls in doing this, and we can be easily wrong, but It can still be used in current scenario as it would be the simples for common traders. Caution expected.

We also know that IV will go up to go down based on perception of outcome, but How VIX move? IF u can calculate approx IV of May and June Options, I will put in the scenario of valuation based of Expected IV.

Please note that June IV is lesser that May IV because of election results and June IV will tend to fall further after results. But Before results May IV will tend to go up and June IV will follow, but It will be far lower than May IV.

Please find the price of VIX on 13th May based on Scenarios of IV of May and June.

May IV	June IV	VIX	Weightage of June IV
34%	25%	27.71	59.89%
35%	26%	28.68	60.28%
36%	27%	29.67	60.74%
37%	28%	30.66	61.16%
38%	29%	31.65	61.56%
39%	30%	32.64	61.94%
40%	31%	33.64	62.29%
41%	32%	34.63	62.62%
42%	33%	35.62	62.93%

Please see the expected value of VIX on 13th May, 3014 based on Expected Volatility Scenarios. Though May IV can go up, but VIX may not go up in same ratio. because of weightage of June IV will be higher.

I am giving this value based on perception that IV of June will be significantly lower than May, Which is also vindicated because 20th May VIX is Quoting at a significant discount.

To Sum it, Though IV of May may go high but VIX may not follow. This is based on my perception which I have discussed and valuation based on that perception.

In Next Part I will discuss the Scenarios for Settlement of VIX on 20th May, 2014.

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 taking position in VIX.