Archive for the ‘Arbitrage’ Category.


Now, before I start crowing, let me come clean on a few points. The Kesar enterprise arbitrage idea was brought to me by ninad (see his blog here). I was smart enough to get on the ride

This deal was announced in March and it took around 9 months for the deal to complete. I have also listed some thoughts and analysis (which include substantial inputs from ninad) over the course of the deal at various points of time

Basic idea
Kesar enterprise is a sugar company with a division which was expanding into the warehousing and other port related infrastructure such as storage. The company announced in Dec 2009 that they would be demerging the infrastructure business. You can find the announcement here.

I am posting my personal notes on the deal below

De-merger evaluation – March 19th
Kesar enterprises has announced the de-merger of its Sugar biz from the Infrastructure warehousing biz.

The numbers for each biz is as follows (in crs)

Warehouse/ transport divison
Revenue: 16 Crs (2010 expected)
PAT: 7-8 crs
Return on assets – 30%+
Valuation – around 60-70 crs minimum

Sugar divison
Revenue – 285 crs gross including excise
PAT – 2-3 crs.

Over 10 years the company has made very small profits. So difficult to value based on profits.

Inverting the problem – Mcap of the company is 82 crs. So is the sugar biz atleast 20-30 crs?

Alternative valuations
Book value – 40-50 crs (after all debt). So liquidation value is higher

Comparative valuation – based on price / sales, most of companies in this sector are priced around 1-2 times. Due to poor profitability, we can price this company at 50% of sales – 100 crs?

On capacity basis, a comparable company like dhampur sugar (UP based company), sells for 0.011 Crs/ TCD.  Kesar enterprise sugar business can then be valued at 80 crs.
So total conservative value is around 140-200 crs.

Action plan – create initial position at 120 levels

Negative case – March 30th
Sugar prices tumbling and market has caused the stock prices to drop by 30% in feb and march. Kesar has seen stock price drop by 10-15%.

2011 will see surplus sugar and hence the futures have started going down. Stock prices could drop

further – if that is the case, delay increasing the position, close to the ex-date as possible

Debt getting split – more to infra company: need to track this
Midcap discount – look at midcap futures to hedge?
How to hedge against drop in sugar industry – can use puts on Balrampur chini and Bajaj Hindustan

Stock goes ex-date – May 19th
The ex-date was 05/14. The sugar business has dropped to around 50 rs which gives a mcap of 30 crs. The sugar biz is in down cycle and hence the prices for all companies have crashed

Key mistake and learning – did not hedge on the down turn in sugar as I was thinking on 30-march.

Action plan – wait for upturn in sugar to exit the sugar biz. A sale at 60 and higher should work out in the deal. May have to sustain further drops before recovery.

Kesar enterprise stock recovers – Sept first week
Price now at 70 levels. Sell the stock!!

Kesar infrastructure yet to be listed – Dec first week
Was able to sell the sugar piece @65-70 prices. Deal which was expected to take 4-5 months at max has taken twice that amount – around 9 months already. No updates yet.

Stock finally listed – Dec 22nd
Kesar infrastructure finally listed at 99. A gain of 30% in nine months. May hold on to the stock

Key learnings

  • Such arbitrage deals take longer than expected. Patience is the key here
  • One cannot ignore short term implications on the stock price and treat it as a long term idea. If possible, options can be used to hedge the position only if the timelines are certain
  • Build the arbitrage position over a period of time and not immediately after the announcement as the price drifts downwards once the buying/ selling pressure subsides

    I recently received an email from pradeep about the ABB buyback offer (see deal announcement here). His question was – Does the buyback have an arbitrage opportunity? My response (With light editing to make it for better reading) is below

    Dear Rohit,
    How are you?

    I wanted to know your opinion about ABB delisting. I have never done arbitrage but ABB has declared an open offer for 900 Rs and the shares, though jumped today to 830 Rs, still is at a 70 Rs discount to the offer price indicated by ABB.

    I am not sure how one should think through this situation. I have invested some money today since the upside seems to be around 8% return in 2 months time. But I am wondering why the stock price did not end up at 880s level since the risk that ABB would withdraw the offer seems pretty low?

    Is there any mistake in my thought process?
    Hi pradeep

    Good to hear from you. Thanks for passing this info. I had a look at the offer and below are my thoughts
    – The offer is not really a delisting offer. ABB – the parent, holds around 51% of ABB India. This open offer is to buy around 23% of the shares to take their shareholding to 75%. The purpose seems to be increase control.
    – the acquirer has stated in the offer document that they do not intend to delist the company.
    See this link here :

    Deal Math
    Let’s look at the deal math:

    If you buy 100 shares, you pay around 83000. With public holding at 49%, the acceptance ratio will be 50-100% depending on the tender levels.

    For acceptance ratio we can look at the shareholding structure. On the ABB site, you can see that around 30% is held by institution and the rest by individuals. 10% is held by LIC.

    The key to acceptance ratio is how the institutions will tender. If they don’t, then you get 100% acceptance and a 10% upside

    If the some of the institutions tender then you have a ratio between 50-80%. Let’s take 70% for assumption sake – then 70 shares get accepted and you make 63000. Let’s assume the rest – 30 shares you sell in market at pre-deal rate of 700-720. The total value comes to around 83000-84000. I am not even assuming the market risk here.

    Best case scenario – 10% gain
    Likely scenario – 3-4% gain
    And worst case – 6-7% loss

    Overall the risk reward are not too attractive, atleast to hold till the tender date.

    However you can adopt an alternative approach – Hold your shares for some time and exit when the price approaches 900 levels. That way you will get a decent gain and not face the downside risk. I have to caution you that this would however be a speculative option.

    Additional thoughts (not part of the above email)
    ABB is currently selling at around 40+ times earnings. It may be undervalued, though I find that very hard to believe. If you share my opinion, then buying the stock at 820-830 levels with the ‘hope’ of selling at a higher price before the buyback would be a speculative position without a valuation support to it. As a result I have given this deal a pass.


    HSBC invest direct recently announced a delisting offer – see here. Ninad has analyzed this deal extensively on his blog (see here and the detailed analysis here). In a nutshell, the company was selling at around 280 per share and as one of the major shareholders had acquired the shares at around the same price, there was a high probability of the delisting price being above this price if the delisting is successful.

    This opportunity appeared to have decent odds of making money – in other words the risk reward analysis showed a decent upside in a short period of time although with a real possibility of a loss. I am not repeating the analysis here as it has been done very well on ninad’s blog.

    If you are thinking – is there is any original thinking here? You are on the right track – none! I am purely riding ninad’s coattails here :).  I have been working with ninad, arpit and few others on various ideas and it has been quite a learning experience for me.

    The process
    There is a typical price action in a delisting scenario. There is a sudden price jump as soon as the delisting is announced. One has to then analyze the deal and figure out the probability of the delisting being successful and the price at which it will happen. This is a subjective assessment and requires the analysis of several factors as illustrated in ninad’s post. The most crucial aspect is also to evaluate the downside risk.

    Once the assessment has been done, the next key step is to start building a position. Typically a few days after the deal announcement, the price may start to drift downwards which is when one can start building a position. Once the delisting is announced, one has to track the reverse bookbuilding process and monitor the price at which the shares are being tendered. Typically if the tender price is higher than the pre-book building price, the stock price will start moving upwards.

    One has to then make a decision on whether to hold on till the end of the book building process or exit at a moderate gain. I typically exit at a moderate gain. If however the tender price at which most of the shares are being is around your purchase price or lower, one should exit as soon as possible.

    The result
    So how did this short term arbitrage turn out? Fairly well and actually far better than expected.

    I created a small position at an average price of around 283 per share and exited completely by Friday at an average price of around 325 for an average gain of 15% in a matter of 15 days.

    The price has now jumped to 360+ as the majority of the shares till now have been tendered at 400. The delisting may or may not happen at this price as it depends on the management of the company. I have however exited my position as I was looking at moderate returns and did not want to risk losing money if the median price is not accepted by the management.

    For starters, identify smart people and coattail them 🙂

    Arbitrage is a fairly profitable activity, especially in a stagnant or down market. It however requires a different mindset – an ability to analyze the deal quickly, take a position and be ready to exit or cut losses at the earliest. It is crucial to manage emotions – both greed and fear as it easy to get carried away.

    Email discussion
    If you are analyzing a deal or following it and would like to share it or discuss with me, please drop me an email on with subject line – ‘Spl situation’. I will be glad to share my analysis, if am doing it or analyze the deal otherwise and share my thoughts with you. You can be assured that the discussion would remain private.