Airtel-RE - Is it expensive now?

Yesterday, Airtel-RE comprising 39.23 cr rights entitlement (RE) got listed and were locked in UC at Rs. 204.50. RE is traded in T2T, with daily price band of 40% on upper and lower side, for UC & LC, while will suspend trading from Monday 18th Oct. Friday 15th Oct being holiday for Dussehra, the last trading day will be Thursday 14th Oct i.e. available for trading for 7 sessions, including today.

As of 30.6.21, 55.9% stake in the company is owned by the promoters. So 22 cr RE may not come up for trading at all, as promoters intent to subscribe to the under-subscribed portion of rights issue as well. Institutional investors held 41% stake, as of 30.6.21, comprising 16 cr RE, which again may not be offered for sale, leaving balance 1.2 cr RE held by retail investors. Yesterday itself, 111.11 lakh RE exchanged hands on both BSE and NSE combined, indicating dry-up of possible future volumes, as RE is trading in the Trade to Trade segment.

Smart investors have learnt to have sold shares in cash, after it went to ex-rights on Mon 27th Sep, 21 and are now looking to mop up RE and apply in the rights issue, which is open till Thu 21st Oct, 21. RE now ruling at Rs. 215, is giving an effective cost of Rs. 350, each of Partly Paid (PP) shares, including application money of Rs. 133.75 paid. Add balance amount payable of Rs. 401 in the next 18 months, gives an effective cost of Rs.750 per share, against CMP of Rs. 706. This gives an arbitrage gain of Rs. 44 or interest cost of Rs. 44, on Rs. 400, to be paid in next 18 months.This works out an interetst @ 7.5% per annum, which may not give any arbitrage trading opportunity, as most of the price differential is captured by RE.

Thus, if share price of Bharti Airtel rises, price of Airtel RE may not rise by an equal amount, post listing, leading to lower percentage gains. Moreover, this trading opportunity in RE has a limited window of less than a week.

Buying Airtel-RE may not be rewarding, especially if one has ability to buy in cash.

This is not a Buy or Sell recommendation, while stock recommendations are provided exclusively to our paid members in the Member Zone.