Power Finance Corporation’s Follow on Public Offer (FPO) at Rs 193 (5% discount from top end price of Rs 203) for Retail Investors…..Should one apply and Invest in PFC’s FPO ?….maybe an Arbitrage will interest you

This one’s for you Swaroop…you emailed me for a view on the PFC FPO

Power Finance Corporation’s  Follow on Public Offer (FPO) at Rs 193 (5% discount  from top end price of Rs 203) for Retail Investors…..Should one apply and  Invest in PFC’s FPO ? …Issue closes on May 13,2011

My sense is even Long Term Investors will be able to source PFC at Rs 175 levels in the Secondary Market….so this FPO did not stir me much….Even though  current Market Price of PFC is Rs 218 and above the top end price band of Rs 203,this may purely a deliberate market making to sail the FPO through…till I had a look at the strong arbitrage play here…more below

Does it make sense to buy in the Secondary Spot Now !?

Why would one buy at Rs 218 in the secondary market when one will surely  get a good,near full ,allotment in this Rs 4700 crs FPO at Rs 193 to Rs 203 !?…so clearly vested market making play is on to keep the counter lively and gainful to help the FPO to be successful…and this is a PSU…so you can guess where the directive is coming from !

Arbitrage Opportunity…IPO & F & O

This Window may have just closed as aggregate Open Interest Positions across exchanges has crossed 95% of the  Market Wide Position Limits (MWPL) for PFC….Check with your Broker …..PFC entering the Ban period will not allow further fresh shorts in F & O …..Only offsets will be allowed……Position will  reopen only when only  the aggregate OIs drop to 80% of the MWPL

So you can go ahead and apply in the FPO relatively safely if you plan to initiate shorts at higher than your assumed  FPO Issue Price of Rs 193,when operations are allowed in the F & O Segment

Perhaps one can short PFC in Futures at Rs 207-210…the range May 26/June 30/July 28 Futures closed on NSE today…Lot size is 1000 shares….and make one maximum application allowed in the retail segment of 980 shares at top end of Rs 203….there is a good probability for full allotment at a 5% retail discount…assuming price is fixed at top end of Rs 203  your cost will be Rs 193….that’s a straight Rs 14-Rs 16 spread…that’s over 7% returns locked inside a month !

You could take the Options route too if you wished…Buy a May 26 PFC Put (Lot size is 1000 shares) of Strike Price Rs 210 at Rs 6.60 premium or Strike Price Rs 220 at Rs 13.50 premium….net of premium (2% to 3%) your returns would drop to 5%….and here you are not subject to margins,like you would be in Futures  

However make your own judgement from  a selection of the + and – below

In Favour of PFC’s FPO Application

• Allottees in the Rs 1000 crs Feb 2007 IPO of PFC,which was oversubscribed more than 73 times, who were issued  shares at Rs 85 have got a CAGR of 25% in the past four years….that’s pretty good….would have been better if they had cashed out at highs of Rs 383 as recent as October 2010
• Issue Size is strong at Rs 4700 crs at Rs 203 Pricing….this should ensure a good allotment
• Strong Arbitrage Opportunity as detailed above
• Current Market Price of Rs 218 is near it’s 52 week low of Rs 205 recorded just two days ago…any further fall will actually provide better Opportunities to buy…so if you see a price of Rs 300 + for PFC in the next two years by mid 2013  then that would be a 25% CAGR for you
• Strong Leadership Position with a Networth stronger than even many top banks to leverage well on huge potential in the Power Sector in the coming decade
• Exploring Banking Foray
• Awaiting Government Clearance to even invest in Equity of Private and Public Power Projects and Companies….currenty only Term Lending Operations exist 
• Valuations are not high…fairly reasonable compared to peers….though IDFC commands a premium

What could deter applying in PFC’s FPO

• Recently  another Public Sector Power Sector Financial Company,PTC Financial Services issued shares in it’s Feb 2011 IPO at Rs 28….Today the Price is Rs 19…36 % down in months….may look attractive to buy at Rs 19 is another thing though !
• No Immediate significant gains seen on Listing
• Good Possibility of shares being available on the Exchanges below issue Price at Rs 175 levels post listing…Long Term Investors can buy then
• Power Projects have seen delays in Implementation Schedules for a variety of reasons…Financial and Fuel Tie Ups yet being negotiated….delays in Environmental Clearance…..delays in procurement of Power Equipment…..this will upset the topline and bottomline projections of PFC
• SEB Drag on PFC
• Continue to hold a negative View for the Power Financing Sector for the short to medium term,given the rise in Interest rates will increase Project costs and even sanctioned amounts may not get disbursed…and the reality that many power projects are experiencing implementation delays  

Swaroop  and all of you out there ,I Hope you enjoyed these brief views on PFC’s FPO…and if you do take the arbitrage opportunity,please do send me atleast 1% of what you earn !

Cheers !