Monday, 7 May 2012

Picking pennies in front of a steam roller ?

At any given point of time, I like to keep around 10-15% of my portfolio in special situations which are not linked to the gyrations of the market. There are triple benefits which I see in process : the tendency to immediately use all of the cash to buy equities is perturbed, the regret of seeing severe draw downs of portfolio in case of a severe market crash is also lesser and thirdly and most importantly I get excitement, happiness and pure joy of spotting an arbitrage and working it out. (There are other workouts like Sudoku and Rubik's cube but I don't find them exciting as I am unable to solve them and also there is no money to be made)

Over the last few years, my thinking has evolved over working on a limited number of special sits and not spreading too thin on a number of them. The criterion which helps me select is that the opportunity should provide at least an annual IRR of 15%, it should have very low correlation to the market, it should have minimal risk and it should be good enough to put a minimum of 3% of my portfolio. If any of these criteria is unmet, I give the idea a pass and wait for the next one to pop on my screen. One source of such ideas is the BSE announcements. I religiously read all the BSE announcements and if I miss it someday, my calendar reminds of those dates which appear as a backlog.

One interesting announcement came on April 26th, 2012 about the NCDs (Non Convertible Debentures) of Jyoti Structures Limited. Jyoti Structures,  a company into the business of telecom infrastructure had come out with a rights issue of 1.02 cr NCDs in Feb 2011. The NCDs had a face value of Rs 120 and carried a coupon rate of 7% to be paid quarterly from the date of allotment till the date of redemption which was 15 months from the date of allotment. Accordingly the date of redemption is May 14, 2012. Between Feb 2011 and now, the NCDs traded in the range of 100-110 bucks thus implying an IRR of more than 20% at different periods of time but the financial position of the company didn't excite me much. The risk of interest not being paid and the possibility of a default on redemption made me stay away from the issue.

On April 26th, the company announced the record date (May 6th, later revised to May 10th, 2012) for the redemption of debentures along with the final payment of interest. The interest along with the redemption amount total up to Rs 122.10 per NCD. The total amount required for payment is 124 crs. One look at the Sep 2011 balance sheet shows that the company had around 580 crs of loan (most of it working capital) and around 1000 crs of net current assets. Apart from it, the company has around 70 crs of investments. Overall, it should not be difficult for the company to raise additional working capital loan of 124 crs against the current assets and redeem the debentures. Additionally, the company has kept up with all the quarterly interest payments on the debentures. It seems that the company is both able and willing to redeem the debentures.

The market price of Jyoti Structures N1 is 120.50. The redemption date is May 14, 2012. Buying an NCD now at 120.50 will yield 122.10 with an average holding period of about 7 days. That's an absolute return of little over 1%.

I see little risk of the payment not being made as the record date has already been announced. But there is never a sure thing. So I am keeping this limited to 4% of the portfolio.

Do you spot a steam roller in sight while I am busy picking up pennies?

Disclaimer : This is not an investment advice. My opinions and views are more or less always biased. If I see some steam roller in any of my ideas, I will surely run away and blog about it later, if at all.


Ashwini Damani said...

Hi Ankur,

That was a really educative post. Loved it.
Just a small question though - You mentioned that you religiously read the BSE Announcements. I wanted to ask why BSE and why not only NSE (or why not both) ??
I always thought that NSE was the better cousin

Ankur Jain said...

Hi Ashwini,

Thanks and good that you liked it. You are right that announcements on both NSE and BSE should be read and I try to read on both.

One reason for preference for BSE is that a lot of obscure instruments like warrants, preference shares etc are sometimes listed only on BSE. Hence I religiously read announcements on BSE and non-religiously on NSE :-)


Ankur Jain said...


Golden Silt. I loved the name of your blog.

Kiran said...

I looked at Jyoti NCDs too and tried to buy multiple times in Feb and March but the liquidity was too low and none of my 'buys' got executed.

I wonder, with an avg. of 50-100 NCDs per day, how did you even manage to buy 3% of your portfolio?

Could you let me know some insights into the buying process? I think I have a lot to learn in this area (and in general will help me keep buying those mid/small caps which have low liquidity too).

Ankur Jain said...

Hi Kiran,

I can't comment on the absence of liquidity in Feb and March. But after April 26, I have been able to garner enough in Jyoti NCD to comprise 3% of my portfolio. One reason most likely is that my portfolio is very small.

Also while buying such illiquid names, I reverse calculate the maximum buy price that I am ready to pay based on my satisfactorily expected return. I don't try to squeeze out the last paise to jack up the returns. Once the maximum buy price is decided, I put my orders around that price without bothering too much about the bid-ask spread. Second step is to be consistent about putting orders on a daily basis. There would be days when nothing gets executed but on certain days the orders get filled in one shot.


Dhwanil said...

Hi Ankur,

Very interesting indeed! 1% in 7 days means amazing returns if annualized. one question though, from the numbers, it seems 1% is net of transaction cost and short term capital gain, is that understanding correct?

Best Regards
Dhwanil Desai

Ankur Jain said...

Hi Dhwanil,

I would not annualise the returns as the figure would look obscene. The absolute return was however fine.

The return calculation is net of transaction cost but pre-tax. I didn't net off the short term capital gain as I compared it with the alternate use of putting money in the bank which will also get taxed at marginal rate. The gains in debentures also would be taxed at the marginal rate because no STT was paid on the transaction of debentures.