HDFC Warrants 3 : Is it worth the premium

Q&A: Questions & Answers
1

HDFC Warrants of Rs 180 are quoting today at Rs 315 each
Lot size 600 warrants
Can be converted to one equity share by paying Rs 2165 anytime within 3 years

Considering HDFC consistent growth for last 10 years at CAGR of 18% on revenues as well as the huge amt of incremental funds raised at low cost, (10000 Cr QIP, 4000Cr by way of warrants, and NCD 9000 Cr @ 5.4%) we can reasonably expect HDFC price to be in the region of 2800 to 3200 in 3 years time

Importantly, its more like a call option where you have the right to covert (buy) but not the obligation

Would appreciate members thoughts on the above

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2

Does not make much sense. Effective price is about 2500 at end of 3 years consider cost of warrant upfront.

You can buy HDFC @ 1800 and get about 12% CAGR including dividend by end of 3 years if prices remain 2500.

Only if there is a huge runup you make extraordinary profits.

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3

But here you invest Rs. 300 for the shares instead of Rs. 1800 right ?

4

What happens when you don’t convert the warrant? Do we get the capital back?

5

Yes we have to pay Rs 300 per warrant (the mkt price) the FV is 185

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6

warrants are akin to a right to buy.
If you don’t exercise the right you loose the Rs 300

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7

Analyzing the choices an investor has in this case:

  1. Buy HDFC stock at CMP and hold it for 3 years and sell in between.
  2. Buy warrant of HDFC and convert it to share and sell the share in market immediately the share is in the account.

Assuming the worst case in both the cases and that investor would sell at the end of 3rd year. If he sells in between and gains, he would get better return.

Hypothetical Market Price Absolute Loss/Gain on transaction Hypothetical CAGR for Choice 2 Hypothetical CAGR for Choice 1 Absolute amount for a lot after Transaction Invested amount for a lot Return in times
2165 0 -100% 6% 0 189000 0.0
2265 100 -32% 8% 60000 189000 0.3
2365 200 -14% 10% 120000 189000 0.6
2465 300 -2% 11% 180000 189000 1.0
2480 315 0% 11% 189000 189000 1.0
2565 400 8% 13% 240000 189000 1.3
2665 500 17% 14% 300000 189000 1.6
2765 600 24% 15% 360000 189000 1.9
2865 700 30% 17% 420000 189000 2.2
2965 800 36% 18% 480000 189000 2.5
3065 900 42% 19% 540000 189000 2.9
3165 1000 47% 21% 600000 189000 3.2
3265 1100 52% 22% 660000 189000 3.5
3365 1200 56% 23% 720000 189000 3.8
3465 1300 60% 24% 780000 189000 4.1
3565 1400 64% 26% 840000 189000 4.4
3665 1500 68% 27% 900000 189000 4.8
3765 1600 72% 28% 960000 189000 5.1
3865 1700 75% 29% 1020000 189000 5.4
3965 1800 79% 30% 1080000 189000 5.7
4000 1835 80% 30% 1101000 189000 5.8

Observations:

  1. if the price remains below Rs 2165, there is 100% loss of capital.
  2. If the price remains below Rs 2480, not 100% loss of capital, but a significant amount of portfolio loss.
  3. If the price remains below Rs 2665, Choice 1 is better, which is Buying HDFC shares is better than HDFC warrants at CMP.
  4. Hence, To act on choice 2, investor should have high conviction of share price reaching more than Rs 2665 in next 3 years. @hitenlala any views on this price under the context of moratorium issue, that might change into higher default. QIP raised may get used in covering those losses. And might require asset sales by HDFC in HDFC life or HDFC AMC.
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9

Many thanks for your detailed review.
There is one important aspect. The warrants are tradeable (like equity shares) which makes the calculation a little easier. In the sense in the case of downward trend in HDFC price/performance, we have an exit option all along. However the price of the warrants will also be going down accordingly.

In making the choice, my “feel” and valuation is that the additional funds generated by HDFC to the tune of 23000 Cr will lead it to maintain a atleast a 18% CAGR in its topline (and accordingly the PAT)

Also, I understand at the warrants can be converted at any time by the buyer during the 3 year period and not necessarily at the end of 3 years. This also means that at any point the price hits 2665 we can convert. This gives a 3 year time frame to make an informed choice

HDFC did hit 2499 around May 2019!

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10

Whether warrant gain or loss in CAGR is correct since this seems to be absolute return?

11

The warrants are tradable just like equity shares
So during the 3 year period, one can also sell off the warrants

12

Did anyone here has calculated time value of these warrants

13

Only guys who are buying HDFC W3 today are who think its going to trade north of 3200

W3 Price CMP Aug 2023 Gain/Loss Equity Warrant
700 2165 -700 -10% -100%
700 2400 -465 0% -66%
700 2765 -100 15% -14%
700 2865 0 19% 0%
700 3000 135 25% 19%
700 3200 335 33% 48%
700 3500 635 46% 91%

risk reward for buying equity is more in favor than W3, If it indeed going to trade around 3200 then 33% is not bad with in 1.6 years, if not then also atleast you don’t lose money.

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14

Anyone has any idea what will happen to this warrant after merger ?

15

“ The outstanding warrants of HDFC on conversion post the effective date will also convert into shares of HDFC Bank based on the aforesaid share exchange ratio. ” Keki Mistry | HDFC duo merger: What will HDFC-HDFC Bank merger mean for shareholders? Keki Mistry and Sashidhar Jagdishan explain - The Economic Times

16

Can someone give clarity on the following:
On exercise of the warrant do we have to pay 2,165 to the company or
2,165 less 180 = 1,985 ?

17

One will have to pay 2165 to HDFC, confirmed it with their secretraial team, refer mail below
Exited the position recently.

One tax related question: would the capital gains be treated as equity capital gains i.e. LTCG after 1 year or Debt instrument types i.e. LTCG only after 3 years?

MAIL

The Warrant holder is required to pay Rs.2,165 per Warrant for exchange of the same with one equity share of Rs. 2 each of the Corporation.

The Exercise Right by the Warrant holders may be exercised, at any time during normal business hours up to 5.00 p.m. in Mumbai on or after the date of Allotment i.e., August 11, 2020, until August 10, 2023 (i.e., within 36 months from the date of the Allotment, but in no event thereafter) (“Warrant Exercise Period”).

Further, post amalgamation of the Corporation into HDFC Bank, the warrants outstanding shall continue with HDFC Bank till the original exercise date and the warrant holders shall be entitled upon exercise of such warrants with the shares of HDFC Bank (on the basis of share exchange ratio).

As you may be aware, the share exchange ratio for the said amalgamation of the Corporation with and into HDFC Bank shall be 42 equity shares of face value of Re.1 each of HDFC Bank for every 25 fully paid-up equity shares of face value Rs. 2 each of the Corporation.

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