Please find below the note on Bajaj Finserv Ltd (NSE Code – BAJAJFINSV): Rights issue – Special situation opportunity shared with Alpha + members on 4th Sep’12.
The stock was originally bought on cum right basis @ Rs 805 with ~10% allocation and sold after ex-date in the range of Rs 790-795.
With a 2-3% loss, we have positioned ourselves for Rights issue shares of Bajaj Finserv at Rs 650/- per share in the ratio of 1:10. In case there’s excess allotment, the gains could be good on this rights issue opportunity.
The detailed note on Bajaj Finserv that was shared with Alpha + members has been produced below for your reference.
Alpha Plus: Special situation for Sep’12 – 4th Sep’12
Dear Alpha Plus Members,
We would like to bring to your notice a Special situation opportunity on Rights issue of Bajaj Finserv Ltd (NSE Code – BAJAJFINSV).
Bajaj Finserv Ltd – Basic details
Bajaj Finserv, the financial services arm of the Bajaj group is engaged in life insurance, general insurance, consumer finance and other financial products.
The portfolio of the company includes 74% in the two insurance companies, namely Bajaj Allianz Life Insurance Company Ltd and Bajaj General Insurance Company Ltd, 50% holding in Bajaj Allianz Financial Distributors Ltd, 40.53% in Bajaj Auto Finance Ltd and 100% holding in Bajaj Financial Solutions Ltd.
The company is engaged in life and general insurance through their joint ventures with Allianz SE namely Bajaj Allianz Life Insurance Company Ltd and Bajaj Allianz General Insurance Ltd. Bajaj Allianz Financial Distributors Ltd is a 50:50 joint venture company between the company and Allianz SE, which is engaged in the business of financial products.
Without getting deep into details, on a TTM basis, Bajaj Finserv is trading at a P/E of 8.3x its trailing 12 month EPS of Rs 97. Consolidated return ratios are strong with RoA of >2.4% and RoE of ~30%. Further, on account of the strong brand equity of the group, stable and experienced management and visible growth potential in all financial services where it exists, Bajaj Finserv is a good company available at reasonable valuations.
Rights Issue details
Bajaj Finserv is currently quoting at a price of Rs 805/- per share.
The Rights issue committee of the company has approved the following:
Post rights issue the diluted TTM EPS of the company will be ~ Rs 88.18.
As Bajaj Finserv is a good company available at reasonable valuations, we would suggest the following allocation strategy:
Allocate 10% of your portfolio towards Bajaj Finserv (minimum 10 shares).
We have suggested high allocation as the holding period is small and to have meaningful allocation on ex-right basis. Please do not buy after 5th Sep’12 as the stock will be ex-right.
Note: If one buys only 10 shares of Bajaj Finserv, he would still receive the Rights Issue application form (CAF) and is eligible to apply for as many additional shares, as he/she wishes over and above his entitled rights of 1 share. The allotment of such additional Rights Equity Shares is made on an equitable basis with due regard to the number of Equity Shares held by the shareholder on the Record Date, provided there is an under-subscribed portion.
To put it simply, for two investors applying for equal number of additional shares, higher allotment is made to the one who had more number of shares in his account on the record date.
On 7th Sep’12, sell your entire holding in Bajaj Finserv in early trading hours.
On the ex-date the stock will get adjusted to slightly lower levels. We expect the stock to correct to Rs 785-795 (assuming 806 to be the closing price on 5th Sep’12). Thus, on selling on ex-date one would be incurring a loss of 2-3% on his/her initial allocation and will be entitled for rights issue shares of Bajaj Finserv @ Rs 650 in the ratio of 1:10.
Return on Investment and Probability of excess allotment
Considering the operating performance, corporate governance and the brand equity of Bajaj Group, it’s unlikely that the stock price will correct all the way down to Rs 650 and below, unless there’s some exceptional situation.
So, if there’s no excess allotment, the cost of acquisition of rights issue shares would be ~ Rs 800/- per share and the loss would be to the tune of 3-4% (inclusive of transaction cost) of the initial portfolio allocation if the price corrects all the way down to Rs 650 by the time we are able to sell rights issue shares.
As far as excess allotment is concerned, the shareholding pattern of Bajaj Finserv is somewhat similar to EPC Industries in which we received ~120% excess allotment i.e. if one was entitled for 10 rights issue shares; he/she received 22 shares on applying for excess allotment. At 120% excess allotment, the cost of acquisition of rights issue shares would be ~ Rs 750/- per share.
This is not to say that in Bajaj Finserv the excess allotment will be 120% as well. There may not be any excess allotment or there could even be full excess allotment, EPC was just being used as an example.
Since the company is good and the valuations are reasonable, the downside risk is limited, while depending on excess allotment there could be good gains in a matter of 1-2 months.
In case of any queries, please feel free to drop a mail or call us.
Ph.: 0120-4109766, Mob: +91-9818866676