With the Power Grid Corporation (PGCIL) stake sale ? the first disinvestment since August 2013 ? just around the corner, financial institutions are devising trading strategies based on the arbitrage opportunities surrounding the follow-on public offer (FPO) of the state-owned electric utilities firm.
The strategies involve the use of PGCIL?s cash and derivatives instruments. These strategies have been formulated based on the premise that there will be a substantial difference between the market and FPO price offered to retail investors, and that the retail portion will be fully subscribed.
FE’s coverage of these strategies does not amount to a recommendation. Analysts expect the PGCIL issue to be priced at Rs 90 apiece with the likelihood of a 5% discount offered to retail category, giving investors the opportunity to play the arbitrage game.
The PGCIL issue opens on December 3, with an aim to sell 78.70 crore shares and raise Rs 7,200 crore. The issue closes on December 5 for institutions and December 6 for retail investors. Not more than 35% of the shares are reserved for retail investors.
One strategy involves a two-step combination ? selling PGCIL shares in the derivatives segment and buying shares via FPO. Brokerages are recommending clients to buy ?put? options for December expiry with a strike price of R95 by paying a premium of R3-4 per share.
Total investment is pegged at R1.78 lakh after paying the premium for December ?put? at R95-strike price and applying for 2,000 shares via FPO. In return, the investors may earn about R11,000-12,000 (6.2% to 6.8%) on their investment that spans roughly one month.
Experts say other strategies involve using more complex three-and four-step processes, which require investors to buy ?call? options, sell December futures, and apply for shares in the FPO. There may be a potential to earn higher returns via these strategies but involve a higher degree of risk, experts said.
?We prefer the bet that involves buying ‘put’ options because there is certainty of pay off when you buy an option. For a more aggressive investor, selling in the futures market can provide higher returns. Our strategy is based on the assumption the retail investor will be allotted full quantity of shares,? said Modan Saha, joint MD & CEO, retail broking, Axis Securities, adding that a slight amount of risk prevails in these strategies as it involves transacting in the derivatives instruments.
Experts claim that there may be a potential to earn returns in the 6-10% range based on these strategies, although they caution that there are risks involved in such complex strategies.
As per Bloomberg data, Sensex has given year-to-date returns of 5.7%. ?It is tricky to guess the quantum of subscription and that’s where people can get trapped. It happened in REC, where retail investors had
expected that the issue will be unsuccessful. However, the issue got good response from the QIBs,? cautioned Arun Kejriwal, director, KRIS Securities.
On Thursday, PGCIL shares ended R2.25 or 2.4% higher at R94.4 on the BSE. The company will officially announce the floor price of the public issue after market hours on Friday.
December futures on the NSE ended at R93.2, up R1.85, whereas December ?put? option at R95 strike price, were quoting at a premium of R3.5 per share.
Options are classified as ?call? and ?put?. When an investor buys a ‘put’ option, he acquires a right to sell the security with an expectation the price of the underlying security will fall.
When an investor buys a ‘call’ option, he acquires a right to buy the security with an expectation the price of the underlying security will rise.