Saturday, May 18, 2013

TTML OFS : Is Management playing fool of Investors and Market ?

Yesterday, Tata Teleservice (Maharastra) Ltd (TTML) came out with an Offer of Sale (OFS) for selling 2.72% of the company, which comes to around 5.162 Crore shares (here)

 TATA Teleservices

The Key Points to note about the company are :

a) TTML is into providing mobile services in Maharastra and Goa. under the brand name Tata DOCOMO.

b) The Company has Negative net worth.

c)  The Company has outstanding Long term liabilities of Rs 5000 Crores, apart from negative working capital to the tune of Rs 2,000 Crores taken care by short term borrowings and payable.

d) The Market cap of the company as on 17th May, 2013 was almost Rs 1600 crores.

e) The company is making losses since many quarters, They have positive EBITDA, which is eroded completely by finance charges and Depreciation.

f) Financial Institutions merely hold 0.77 % in the company.

The Salient features of TTML OFS were :

a) The Base price of the OFS was not disclosed, It was disclosed only after the all the bids were received at various price points. They had time to submit the Base price by 2.00 pm on the day of OFS.

b) TTML took a relaxation from SEBI to reduce the cooling off period from 12 weeks to 3 days to launch another OFS, if the First OFS is not fully subscribed. I guess TTML would have taken the permission because they are aware that Financial institutions may not be interested in holding these shares and Retail Investors may have their own thought process.

c) The OFS was to be offered at multiple clearing price.

What Happened the then ?

a) OFS opened as planned and bids were collected to the 4.36 crores shares, with VWAP price of Rs 5.67. If we remove the outliers in the bids and we only consider bids up to 25% below the previous day closing price the bids were up to 50% of the book.

b) Then after the OFS was closed the sealed envelope of Base price was opened by exchanges and the BASE price was 8.90, Which was also the previous day closing price.

c) The came the circular that the OFS stands cancelled as bids received  were below the base price and also the book was not fully subscribed.

What Happened to Investors and Market ?

a) Since the Base price was to be declared after completion of OFS , people felt that there will be significant discount to market price to stocks (That is the norm in most OFS), people started applying in OFS and selling some part in cash market to book partial gains.

b) There was huge volume in the stock and as there were many sellers, there were also buyers in the stock (I am sure, apart from noise the buyers would also know that there is an OFS in the market and Base price is unknown)

c) Now with cancellation of OFS, we will find a spike in stock price and all shorts will have to cover their positions. The people who were buying of the day of OFS will make extra ordinary gains.

What are my concerns ?

a) In most of the cases the Base price of OFS is always below its current market price. but still TTML chose to price its OFS at previous day closing price.

b) The management took permission for follow on OFS, and also reducing the cooling off period. It means they had the perception that OFS would not be subscribed fully. Still they choose to price their OFS aggressively, after knowing that OFS may fail.

c) The management decided to keep the base price disclosed, if they were not ready to sell shares at a discount, but still conflicting signals were given to market about pricing. 

d) Is there a probability that the prices were hammered recently before the run up to OFS ? NO the price of these stock seems not fallen in recent past as 21 DMA 8.85 and 14 DMA was 8.72 , with the highest traded price in these financial year is Rs 9.40

e) Was the management expecting aggressive bids ? 99 % of the bids received were below the base price and Not a single shares were subscribed by any institution.

f) Who gained in these process ? Nobody except the buyers on Exchange on the day of OFS, They will have super normal profit in short run. The Tata were not able to sell their shares, Investors and liquidity providers and arbitrageur were in lurch. 

Conclusion :

a) Why would management create a secrecy around (In terms of Base Price) the OFS and then they have nothing to give.

b) The total size of OFS was only to the tune of Rs 40 Crores to Rs 45 Crores, buy still the Tata's were not able to place it with investors ?

c) Will they bring OFS again and then will the liquidity player and arbitrageur take calculated bets in TTML ? Would they not look at the OFS with suspicion ? and may expect more Risk Premium?

d) Is it an eyewash to SEBI , that We tried to place the shares but we were not able to offload it ???

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I had applied in OFS of these stock.