VALUE PILL

EVEN IF THE SCRIP TRADES ABOVE RS 500 AFTER THE OPEN OFFER, YOU STAND TO PROFIT, SAY ANALYSTS

Ashish Rukhaiyar MUMBAI

    THE impending open offer price of Rs 737 per Ranbaxy share does not seem to have arbitrageurs excited. This is evident from the lacklustre trend in the stock price since the deal with Daiichi was announced pre-market hours on Wednesday. On Thursday, Ranbaxy fell 3.1% to close at Rs 543.50. But market watchers feel there could be decent — if not lavish — money to be made from the open offer after factoring in various assumptions like company fundamentals, valuations, number of shares tendered in the open offer, future prospects and post offer price of the stock.
    Interestingly, many brokerages were peddling their analysis of the "money making proposition" on Thursday in their attempt to please their clientele for whom the recent past has been tough. According to one such study, even if Ranbaxy shares trade in a price upward of Rs 500 post the open offer, investors stand a chance to make a decent profit.
    The explanation goes like this. Since minority investors hold a little over 65% in Ranbaxy, only one-third of the shares submitted in the open offer will be accepted, assuming all minority investors participate. An investor, who buys 100 shares from the market for Rs 543.50 and tenders them in the open offer, will receive Rs 737 per share for only 31 shares, while the remaining 69 will be returned to him.
    The average price for these 69 shares would come to Rs 456. For the investor to make a meaningful profit on his remaining shares, any price above Rs 480 would suffice.
    CLSA, on Thursday, termed the offer "attractive from minority shareholders perspective". "With a minimum 30.7% of shares being likely to be accepted in the open offer (Rs 737 per share) and our fair price estimate of Rs 525 per share (for residual 69.3% shares), we arrive at target price of Rs 590," said the foreign brokerage.
    However, therein also lies the catch. For, analysts who feel that there is not much on the table for investors, say there is no guarantee that price would remain above Rs 500 post-open offer. They are of the view that the stock would come under heavy selling pressure after the open offer as investors who bought with the sole aim of arbitrage gains would sell in the open market. There are many who differ as institutional investors who hold more than 40% are long-term investors and typically do not resort to selling in the open market after the open offer. This would take care of the stock price after the open offer, they add.
    Valuations also suggest that investors stand a chance to profit from the sale of residual shares in the open market. Currently, the stock is trading at a PE of 33.87. Historically, Ranbaxy has been trading at higher PEs compared to its peers like Cipla and Dr Reddy's Labs. At a price of Rs 500, the PE would come to around 31, which is only slightly higher than its 2007 average PE of 28.62. KRIS director Arun Kejriwal said the deal is a sure way of generating "risk-free return". "In uncertain times, when people are not confident whether the bottom has been made, Ranbaxy offers a good opportunity to park money," says Mr Kejriwal.
    However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio.
    ashish.rukhaiyar@timesgroup.com