Thursday, March 21, 2019

Valuation of Vodafone Idea Lmited Futures in case of Rights.

Vodafone Idea Limited (Idea) came with a Rights issue of massive 25K crores. The rights will be subscribed by Vodafone and Idea. Also any unsubscribe portion will be subscribed by promoters.

I am writing this blog not to discuss the valuation of the company but the valuation of its futures in Derivatives segment. It is my endeavor  to highlight the valuation of this instruments in this special situation.

Background : CMP of Idea is 33.30, March Futures is 31.95/-,  April Future is 29/- and May Futures is quoting at 26.55/-. The Ratio of Rights is 87 : 38 shares. 

I have received suggestions to buy Cash and sell May futures (though it is quoting at a very big discount ). The rationale is that the rights is @12.50 and since the issue is very big and in a beaten down sector there can be over-allotment.

Rather than commenting on strategy, if it is a good idea, I will jot the facts on valuation (Futures Prices) in front of you and then you can take a conscious decision.

Valuations : For every special situation rights like Rights, there will be corporate benefit in derivatives segment of NSE. The corporate benefit price is derived from Closing Cash price of Stock on eve of Ex-date.

I may not know the closing price of 29th Mar, so I will base my valuation of futures (Corporate action price ) at CMP.

Based on CMP, The Adjustment factor is 0.57, so the new
a) Lot size can be approx(21230)
b) Ex rights price will be 18.82/- (March Futures will not exist on Ex date)
c) Ex-right April Fut Price will be 16.45/- (29*12000/21230)
d) Ex-Right May Fut will be 15.01/- (26.55*12000/21230)

Interpretation :

So when you are buying shares @33.30, your cost (effective cost after rights) is 18.82.

Now if you sell May futures @15.01, effective price after adjustment. You will be incurring a straight loss, but there are high probability of over-allotment.

To reach a Break-even point (BEP), You may need an extra allotment of 168 shares for every 87 shares. It means you will need an over-allotment (1.94 times , Total allotment of 2.94 times).
(I am not considering Brokerage, STT, Statutory charges, Interest, Margins cost)

There seems optimism on over-allotment and I may not know if all institutions will apply/ over apply, as Retail / HNI shareholding is comparatively small.

I am only covering Futures pricing. Option pricing will involve different calculation.

I welcome your critical comments and suggestions.

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


PS : I will try to write blog at shorter frequency.