Skip to main content

Opportunity For Arbitrage In FPO

Besides the company fundamentals, take discount differential into account

On Tuesday, when the Power Finance Corporation (PFC) follow-on public offer (FPO) had opened for subscription, many investors would have been wondering if it was agood time to enter the stock. WHAT IS AN FPO?

An FPO is a primary market issuance when companies issue further fresh equity or when promoters dilute their stake in the company. These companies, hence, are already listed on the bourses.

Similar to an initial public offering, FPOs have a price band fixed for the issue. Unlike the corporate actions (such as bonus, rights' issue that are applicable only to the existing stake holders, etc), FPOs are open to all investors. The price band for an FPO depends on the market value of the existing company shares and the reason for raising funds.

ARBITRAGE OPPORTUNITY

Typically, FPOs provide a good arbitrage opportunity. If the company's share price is more than the FPO price, a buyer gets a chance to exit the company at a higher price and enter at a lower level. But the window of opportunity may not last long, because the stock price will return to the FPO price before listing. Things can be completely different if the share price is lower.

What can help a retail investor is the discount offered during FPOs. Usually, retail investors are given up to 5-10 per cent discount on the issue price.

Once a company announces its FPO, the stock movement also depends on the float. Typically, stocks of companies with a low float (implying the number of stocks of the company is low) are in demand and command a scarcity premium.

WHAT TO LOOK FOR?

A merchant banker says the decision to invest in PFC's FPO can be based on the discount differential in the price of the issue and its market price. He says in a public sector issue, although the discount is lesser compared to a private company's FPO, retail investors are given a discount on the issue price as well. Companies are usually advised to keep a discount of 10 per cent to the market price, he adds.

The price band for the issue has been fixed at `193-203, with a five per cent discount for retail investors. The company's shares are trading at a premium to the FPO price at 214. Investors, as a result, will get a discount differential of more than 10 per cent (this includes the five per cent discount to retail investors).

After listing, there is every likelihood of the share price dipping below the issue price. Since fresh shares will be added to the company's free float, the earnings per share (EPS) is likely to come down. This will put pressure on the share price. Although the volumes traded of the company will increase, there will be some pressure on the price, he adds.

Although the markets on the whole has been volatile, FPOs that have got listed since 2009 have seen a massive drop in their share prices. The Sensex has risen more than 90 per cent since 2009. Most FPOs that have been listed during this period have fallen quite a bit.

Birla Shloka Edutech has dipped 67 per cent below its issue price since its listing. Shipping Corporation of India has shed 24 per cent, NTPC 14 per cent, NMDC 10 per cent and Tata Steel 2.5 per cent. The FPOs of Rural Electrification Corporation and Power Grid have given positive returns (9.36 per cent and 14 per cent, respectively).

Along with the fundamentals of the company, one should look at the pricing of the issue before making any investment decision.

Ø       FPOs provide a good arbitrage opportunity

Ø       One should consider the discount differential when investing

Ø       Stocks with a low float will be more in demand and command a scarcity premium

Ø       With fresh shares added to the company's free float, EPS is likely to come down

Along with the fundamentals of the company, one should look at the pricing of the issue

Popular posts from this blog

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Commercial Paper (CP)

Invest Mutual Funds Online Download Mutual Fund Application Forms Commercial Paper (CP): These are issued by corporate entities in denominations of Rs.2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs.   Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs ie it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium. ----------------------...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

Why credit history is critical?

Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score. What is a credit history? Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now