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Wednesday, August 29, 2012

HDFC warrant holders reap a windfall on conversion

Equity warrants may have lost their charm as an investment option in a languid market, but HDFC shareholders may have no reason to complain as their investments in warrants of the country's largest housing finance company have yielded higher returns than benchmark indices.

HDFC shares have been quoting at a premium to the warrant price for many weeks ahead of the conversion date (August 24). As a result, the conversion option turned attractive, prompting holders of Rs 5.5 crore warrants to exchange them for shares. Issued at a price of Rs 55 a piece three years ago, the warrants are estimated to have offered investors as high as 120% plus return on conversion - much higher than a 13% rise in the Sensex during the period.

In recent years investors in many other companies have let their warrants lapse, as they preferred to forgo the initial 25% payment made towards subscription after stock prices slipped below conversion prices. In some other companies, investors chose to convert warrants into equity at a premium to the market price.

On Tuesday, HDFC shares closed flat at 723, resulting in a gain of 68 for warrant holders whose total investment per warrant is Rs 655 (issue price of Rs 55 plus conversion price of Rs 600). As most warrant holders exercised their conversion option in the recent months and closer to the due date, the actual returns, according to analysts, will be based on the initial investment made at the issue price. This works out to 123%.

In August 2009, HDFC had issued over one crore warrants at Rs 275 each and the conversion price was fixed at Rs 3,000 based on the then face value of Rs 10 per share. Subsequently, the company split the Rs 10 stock into five shares of Rs 2 each due to which the number of warrants increased to Rs 5.5 crore while issue and conversion prices were adjusted to Rs 55 and Rs 600, respectively. The warrant holders had the alternative to exercise the conversion option within three years from the date of allotment.

"HDFC is a defensive stock and so the share price has been holding firm despite uncertain market conditions. This prompted warrant holders to exercise conversion option so that they earn a good return on conversion," said Vaibhav Agrawal, vice-president, research (banking), Angel Broking.

He, however, said the HDFC issue was a unique combination of debt and warrants which were mostly issued to institutional investors. In many past cases, companies had issued warrants to their promoters who generally do not invest in such instruments to earn returns on conversion. Thus, returns from investment in HDFC's warrants cannot be compared with those earned from similar instruments issued by other companies, said Agrawal.

A large number of warrants are expected to have changed hands from the original holders to new investors amid active trading in the securities ahead of the conversion. According to brokers, many HNIs and institutional investors bought HDFC warrants in the recent months as they sensed an arbitrage opportunity as well as dividend benefit. HDFC paid 550% dividend for FY12, higher than 450% in the previous year.

Source: EconomicTimes


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