Wednesday, January 12, 2011

Jyoti Structures Ltd - Interesting rights issue

Jyoti Structures Ltd (JSL) is basically a power EPC company, executing projects in power transmission, substation and distribution. The company has operations in India, Middle-East and Africa.

The company had recently announced a rights issue, the terms of which are as follows:
  • The company will issue 1 non-convertible debenture of Rs.120 for every 8 shares held.
  • Along with the NCD, 2 warrants, convertible into equity shares will also be issued ‘free’. Effectively, for every 8 shares held, one gets 1 NCD and 2 warrants.
  • The NCD will be redeemed after a period of 15 months at par. Till then the company will pay interest on the same @ 7% p.a.
  • The warrants will be converted into equity shares at Rs.120 within 18 months of the issue.
  • The record date for the same is 15th January 2011. The stock goes ex on the 13th.
  • Both the NCDs as well as the warrants will be separately listed.

The opportunity (?)

  • Buy shares of JSL before ex-date (a larger position can be taken in view of the ratio). Sell them on/after the ex-date.
  • After that, apply for the NCDs and warrants. (Apply for more than what you are entitled to. You might get lucky!) ;-)
  • So what one will be left with are the NCDs and warrants.
  • Hold on the NCDs or sell them off post listing. What remains with you are warrants which will be converted into equity at a later date. 
  • However, till then, your capital does not remain invested. In future, at the time of conversion, if the price is above Rs.120, one makes profit. If not, just let the warrants lapse and you don’t lose anything. Heads you win, tails you don’t lose!
Is it that simple? ABSOLUTELY NOT!

Lets consider a few more points:

Wont the stock price fall on the ex-date? Wont there be a loss while selling the existing shares?
The warrants conversion price is almost the same as the CMP. Just like it happens post a QIP issue, I don’t expect the price to fall on the ex-date because of this event.

The NCDs are yielding only 7%. Could they list at a discount then? Alternatively, if one holds on to the same, what about the opportunity loss, since one is getting lower returns here than a regular bank FD.
This is a very valid point. There is an opportunity loss of about 2%, in case one holds on to the NCDs and I think they would surely list at a discount to the par value. One should keep that in mind.

Will the stock price rise in the near future? Will the price be more than the conversion price, at the time of conversion?
That is anybody’s guess!!! However, consider the following points:
  • At current market cap, the stock does not appear to be over-the-top expensive.
  • The company has an order book position of more than 2x FY10 sales.
  • The management is very clear that they do not take up orders which hit their margins. They do not want to grow just for the sake of topline.
  • Powergrid is expected to release orders in the near future. JSL could be a huge beneficiary.
  • Promoters have been buying material quantities in the recent past.

Although all this does not guarantee that the stock will move up, one should consider the same. And in case it does not move up by the time of conversion, one can just let the warrants lapse.
Effectively, one can create a convertible-equity-instrument, without having any capital blocked and paying little cost. The cost would be 2% on Rs.120 (NCD interest opportunity loss) = Rs.2.4, for 2 warrants. Which is Rs.1.2 per warrant. Interesting!

Views, opinions, brick-bats and ridicules are most welcome!

Cheers and happy investing!


excel_monkey said...

Rs. 1.2 (1%) for ATM (at the money) 18 months option is ultra cheap

however, loss on the ex day could be very high

Neeraj Marathe said...

Hi Excel,
Went ex today...stock has, in fact, fall in price..

Raja said...

Wish you had shared this a little earlier ! I would have surely put some money to try this kind of opportunity out and learn in the process . Now it's only a little too late. however will keep track of this story from this fence :)

thanks for sharing such beautiful analysis!!

Neeraj Marathe said...

My apologies Raja,
Due to work commitments, i got late putting it on..
But such situations will keep on happening..whats more important is that we learn and remember our experience in this one..

Preet said...

Jyoti Structures now at you see any value here neeraj- Rgds

Neeraj Marathe said...

Hi Preet,
Yes, i do. However, new orders released from Powergrid wud b a big trigger. To be frank, i do not know if and when that wud happen. I am into it only for the warrants. I am out of the original position on the ex-date itself. More of a special situation than a regular investment.

Anonymous said...

Dear Neeraji,
Hope you still tracking Jyoti structures.It is running around 54 level.Last few weeks over all trading activity increased this counter.what is your view about current MRP?how will affect low promotor holding for long term growth?Is it worth to add long term portfolio??

Neeraj Marathe said...

Dear Anonymous,
My biggest problem with a company like Jyoti Structures is the absence of cash flow generation. They will always have to depend on equity dilution-debt raising to fund their growth. It becomes a loop..take up debt then dilute to make debt-equity better..then take up more debt.
While in the short term, there cud b decent price movements due to expected power sector reforms, all this is merely news based. I do not find it as an attractive long term investment candidate.

Anonymous said...

thanks sir for your prompt reply !!! we Always thinking about buy when price was up..ha ha

Neeraj Marathe said...

:-) most welcome..

Anonymous said...

Do you see value in buying Jyoti Structures at today's market rate? The company has fallen down from peak of 500+ to 50 odd levels.

May be it was not a good LT bet but at current valuations it gets discounted and can be term as mid-term investment?

pls post info.I like reading your articles in detail.. amazing ideas and non-bisaed views.

Neeraj Marathe said...

Hello Anonymous,
as i said earlier, the major problem with the company is that they keep on needing cash..they dont generate much themselves. so debt keeps on increasing and dilution becomes imminent periodically.
the industry is also going thru a rough patch currently. (please take a look at my elecrama notes).
i do not know bout mid-term..but i do hope that if nothing happens, one shudnt end up being a 'compulsory long term investor!'