Archive for June 2nd, 2010

Standard Chartered IDR : “Opportunity in Crisis”

Standard Chartered IDR : “Opportunity in Crisis”

By Jagannadham Thunuguntla

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The bad market conditions are putting pressure on the ongoing IPO of Standard Chartered IDR. However, if one closely observes, there is some opportunity emerging in the Standard Chartered IDR.

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What’s the trade?

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When the price of Indian IDR was fixed, the trading price of the Standard Chartered Plc share on London Stock Exchange was trading in the range of GBP 15.5.

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However, thanks to the stabilization of the global equity markets in the past 2 to 3 trading sessions, the price of the Standard Chartered Plc on London stock exchange has reached to the tune of GBP 16.82 on Thursday closing. Hence, the Indian rupee translation of the trading price in London stock exchange works out to the equivalent price of Rs 1140. As, there is 10:1 exchange rate, the effective equivalent price of Standard Chartered Indian IDR works out to Rs 114.

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If one observes, the Standard Chartered IDR issue book is getting built at the lower end of Rs 100.

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So, the institutional investors and large HNIs can take this opportunity, by simply applying for IDRs in the Indian public issue; and shorting the share in the London stock exchange. Hence, there is a spread of Rs. 14 (that is, between Rs. 114 and Rs. 100), that is 14%.

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This trade is more fascinating, especially, on the back of the fact that recently the listing days from the closure of the issue have been reduced to 12 days from the erstwhile 22 days. So, 14% is the spread available for a trade of just 12 days.

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Further, it is appearing that the IPO book will at best get barely subscribed one time. Hence, there is no risk of oversubscription. So, whoever applies is assured of allotment. Hence, as there is no spill-over risk due to oversubscription, this trade can really work well.

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It seems there is a clear 14% opportunity in just 12 days for institutions and large HNIs.

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Even if we assume that the final issue price will be in line with the Rs 104 per IDR, as applied by the Anchor investors, still there is Rs 10 spread (that is, between Rs 114 and Rs. 104), that is to the tune of about 10%.

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The couple of assumptions that need to be highlighted are:

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(a) The IDR issue will be able to get closed successfully and will not get called off; and

(b) The currency risk is properly hedged

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Conclusion

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As this is the first ever IDR issue in India, the learning curve will be steeper for every one associated in the value chain, regarding the concept and nuances of the modus operandi. As always, the “first mover advantage” can prove to be invaluable.

Weekly Update 31st May – 4th June

Markets posted gains in the week gone by as the investors felt that stocks are battered down harshly in the short run. Buying came in Asian stocks on speculation that China will rein its effort to cool its economy as European debt crisis threatens a global recovery. Concerns also rose that the banks in Spain may face further losses after IMF urged Spain to do more to overhaul its ailing banking sector. The regulator is pushing ailing banks to merge with stronger partners.

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US Treasury Secretary Geithner said that US, China along with India, Brazil and other emerging economies are experiencing stronger recovery as compared to earlier anticipation and are positioned well to face the challenges from the European Nations. The OECD revised India’s GDP growth forecast for 2010 to 8.2% from its earlier estimate of 7.3%. It also raised the growth forecast for 2011 to 8.5% from its earlier estimate of 7.6%. The OECD also said that underlying inflationary pressures are likely to persist given the strong outlook for demand. IMF pegged India’s GDP growth forecast at 8.75% in calendar 2010 and 8.5% in calendar 2011 on expectations of strengthening of domestic demand. Back at home, RBI in order to ensure optimum liquidity in the system so that the public and private sector credit demands are met, eased credit lines for the banks.

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Banks can now borrow additional 0.5% of their net demand and time liabilities from the Central Bank under the repurchase agreement till 2 July 2010. In addition, RBI said that as an adhoc measure, banks can seek a waiver for any shortfall in maintenance of the prescribed 25% Statutory Liquidity Ratio (SLR) while availing the temporary facility. This step is taken by the RBI in view of the temporary liquidity pressure in the market because of the 3G auction and advance tax payments in the coming days. Talking about the much awaited Indian monsoon, the arrival is expected to be delayed by three days after tropical cyclone laila stalled its progress.

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Inspite of the big rally in last three days, overall trend of world stock markets is still down. Even the base metal commodities including Crude saw a rally but could not sustain at higher levels. Rupee which had crossed 47.70 levels intraday week came down to 46.30. Volatility is expected to remain high. Nifty faces resistance between 5100-5150 levels and Sensex between 17000-17200 levels.

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Persistent fear about the European region’s sovereign debt situation may keep buying intact in bullions. Commodity market is still volatile and jittery as crisis is still looming over EU nations. However, satisfactory first-quarter economic figures from the prominent Asian countries viz., China, Japan, Singapore, Taiwan and Malaysia will try to offset steep decline in base metals and energy complex.

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Furthermore, the week is full of event risk as well as many nations are coming with their first quarter GDP data, if any improvement occurs, it will stimulate buying in base metal and energy section. Dollar index, which is on track to give its best monthly performance since October, 2008 is likely to trade in a range in short run.