Hi friends,
Seeking your feedback on what looks like a too good to be true opportunity in Wheels India.
Basics of the idea:
1). SEBI allows promoters to bring their shareholding within the regulatory limit of 75%, one was allotting rightsonlyto minority shareholders. Thus, in these issues, the promoters forego their rights entitlement and only the residual shareholders participate in such a way that post issue promoter shareholding is brought down to less than 75%. In the case of Wheels India, promoter (TVS group + Titan International) is at 91.44%. The promoters have thus chosen to use the rights to minority holders as the route to bring down their shareholding also presumably raising much needed funds for the company (to pay down existing debt) in the bargain.
2: Terms of the Issue
CMP 825 (A)
Current o/s Equity : 9869444 shares (B)
Fresh Issue : 2162835 shares ©
Diluted Equity = B+C = 12032279 shares (D)
Issue Price 400 (E)
Record Date for entitlement : February 14th 2014
Theoretical Ex-rights price is 749.
3). Returns and the risk
Assuming you are able to sell your 20 shares at the theoretical ex-rights price of Rs 749, you would book a loss upfront of Rs 1528 (825-749)*20 on your investment of Rs 16500.Subsequently, if you are able to sell these 51 shares at the same ex right price viz 749, you would make a profit of Rs 17799/- explained as [(749-400)*51]. Net of your loss of Rs 1528 booked earlier, you would still be left with a profit of Rs 16271/- leading to a theoretical return of roughly 98% on your investment of Rs 16500/-!!!
Risk is mainly from the not so good fundamentals of the company with mid-teens ROCEs, high debt on the books, lack of pricing power being primarily an OEM supplier and the general pangs of overall auto industry slowdown.
We have put out a detailed note on the post as well here:
http://http://manufacturedluck.blogspot.in/2014/02/wheels-india-rights-issue-free-lunch.html
Do you think there is a chance to manufacture luck here?