Profit Guaranteed - Orbit Corporation

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It is often stated that there are many opportunities in the stock market but what is required is a high level of alertness to be able to take the right advantage. Speaking of opportunities, there is one in the form of Orbit Corporation (OCL), a Mumbai-based real estate player. This is one counter that has put on the platter a chance to earn a decent level of profit without the need to take undue risks. This, surely enough, may appear to be a contradictory recommendation considering that the real estate industry is yet to come out of woods.

Now that’s true, of course, but the fact remains that there is a good bite available in the recently announced warrant conversion price of OCL. The company has fixed the warrant conversion (for third trench) price at Rs 42.85 and if we compare the same with its current market price of Rs 183, then it provides a real good reason to make some profit. At the time of the IPO, OCL attached a warrant to each issued equity share, which was supposed to be converted into equity share during the period of 18-30 months after the issue. The criterion for the conversion of a warrant stated that ‘if at the time of conversion the CMP is less than the issue price it will be issued at 30 per cent discount to the CMP and if the CMP is above the issue price then there will be a 10 per cent discount’.

Here, the CMP is the average price of equity shares, computed as an average of the weekly high and low of the closing price during the six months immediately preceding the month in which the conversion price is announced. Considering the above norms, the last six months’ average price stands at Rs 61.22 and as it is lower than the issue price of Rs 110, it will be awarded at a 30 per cent discount providing a conversion price of Rs 42.85.

The best part is that the warrants are tradable and this fact provides an opportunity to those who did not manage to get the warrants at the time of the IPO. Currently the Orbit warrant (BSE Code 961665) is trading at Rs 103 and even if we add the conversion price of Rs 42.85, the cost works out to Rs 146. This clearly provides an upside of more than 25 per cent on the CMP of Rs 183. However, and as must now be obvious, it is also true that the gap may get narrower. Yet, investors can buy the warrants keeping an eye on the CMP.

What if someone is in the hold of the company’s shares as well as warrants? The prudent strategy would be to sell the shares and apply for conversion. The reason behind the same is quite simple. If someone converts 100 warrants at Rs 42.85 and sells 100 shares at Rs 183, the buying price is Rs. 42.85 and the selling price is Rs 183. Moreover, after the allotment of shares in the wake of such a conversion, the number of shares will be similar.[PAGE BREAK]

However, if you are in the possession of only warrants, the wisest step would be to convert the same into shares. The reason is that after the poor performance of the real estate companies on the bourses, this seems to be the lowest conversion price and hence provides a great opportunity for conversion.

And what if you happen to be holding only equity shares? In such a case, the right thing to do would be to exit from the counter. Once again the reason is quite simple - the huge gap between conversion prices and the market price is expected to get narrower and hence investors can buy the scrip at lower prices. Another option in case you want to continue to hold the shares is to exit from the counter and buy the warrant at Rs 93. Therefore the selling price will be Rs 183 and buying price will be only Rs 146.

Regarding the conversion, if someone wants to convert 100 warrants he/she has to pay Rs 4,285 by way of cheque or demand draft favouring ‘Orbit Corporation Ltd - Warrant Account’. The period for conversion of the warrants ends on July 2, 2009. However, the notification states that the applications should reach the Registrar on or before June 25, 2009. The applications reaching after June 25 will be processed during the subsequent conversion period at the new conversion price. As regards the allotment, the shares will be allotted after ten working days from the end of the expiry of the conversion period i.e. on July 16, 2009.