Dear Readers,

A few months back (on 14th Sep’11), while referring to Piramal Lifesciences Ltd (PLSL) and Piramal Healthcare Ltd (PHL) demerger arbitrage opportunity, we mentioned about some easy gains on the platter and yes the gains have truly come very easily and that too when the market is in a bad shape.

Earlier on 14th Sep’11, when the opportunity was shared, PLSL was trading at a discount (Rs 86.00/- per share) in comparison to PHL (Rs 355.00/- per share) based on the 1:4 de-merger ration fixed by the company then, and thus offered a good arbitrage opportunity.

By the time we came close to the closure of the opportunity i.e 22nd/23rd Dec’11 (based on whether one wishes to book profit before the ex-date or wait for the issue of PHL shares by selling PLSL shares on ex-date i.e. 23rd Dec’11), PLSL was trading at a premium (Rs 100.00/- per share) in comparison to PHL (Rs 380.00/- per share).

Either way, one still made 12-14% return in a matter of 3 months, while the market is down by 6%.

Case #1 – Selling before the ex-date

  1. Purchase price of PLSL (on 14th Sep’11) – Rs 86.00/- per share
  2. Selling Price of PLSL (on 22nd Dec’11, one day before the ex-date) – Rs 98.00-100.00/- per share
  3. Approximate absolute gain (before tax) – 12.5%
  4. Approximate annualized gain (before tax) – 50%

Case #2 – Selling on ex-date

  1. Purchase price of PLSL (on 14th Sep’11) – Rs 86.00/- per share
  2. Selling Price of PLSL (on 23rd Dec’11, on ex-date) – Rs 7.00/- per share
  3. Cost of acquisition of one share of PHL (1:4 demerger ratio) – 86*4 – 7*4 = 316.00/- per share
  4. Current price of 1 share of PHL – 377.00/- per share

Since the PHL shares should get allotted in 15-20 days time, PHL may correct to 350-360 odd levels. Though the absoulte gains would be similar to the ones earned on selling the shares before the ex-date, however for cases where we don’t see any value unlocking, we prefer to book profits by selling shares before the ex-date i.e. the Case #1 and thus avoid time risk and price risk.

Note: Special situations/Arbitrage opportunities are to a large extend immune from regular market risks and thus it is always a good idea to scout for them (look for de-listing opportunities, de-merger cases. Ex: Search UTV on this site) and allocate some 15-20% of your portfolio (spread over 4-5 such opportunities), than keeping surplus cash idle.

Make sure the opportunities you invest in have a very low downside risk, and offers returns in excess of 24-25% on annualized basis. De-listing cases, where the Promoters have already indicated the offer price are usually immune from market risks while the un-paired de-merger cases can be volatile. So, its important to manage the time and price risk in such cases.

Ekansh Mittal – [ekansh@katalystwealth.com]