January 23, 2010

An arbitrage case study : Elantas beck

update 27th jan
I think it was rightly pointed out by two readers that the post is a bit vague. I made the assumption that delisting norms are general knowledge and most people would be aware of it. In addition, i did not discuss much about the company too and the delisting process. I am writing up a post on these missing details and will publish it soon

I have been working on some arbitrage ideas with my good friends ninad kunder and arpit ranka. Both are extremely smart investors and blog here and here. Ninad occasionally blogs about some of his arbitrage ideas on his blog and I would recommend following his posts on such ideas.

Following are my personal notes on the idea during the course of this opportunity. These are my personal notes. However based on my discussions with ninad and arpit who clearly have more experience on this, I later on revised my probabilities.

Opportunity (dated 11-Nov)
Elantas beck has announced a buyback for the 11.5 % holding. The current price is 460 which is 11 times earnings. The board approval is pending

Scenario analysis
Upside: likely 15-20% if successful
Downside: if the company delays, then price could drop down to 250 odds level (pre-delisting) levels. low probability of that happening. More likely to see a drop of 20% 320-350 levels. At that price the company would sell @8 times earnings

Probability of delisting happening : 70%

Expected gain is 6%
Plan : sell @ 525 and higher. if drop below 350, buy

Opportunity tracking

Update 12/7
company announced buyback. Floor price is 219. board has approved 330
final price will depend on price @ which 50% of balance stock (around 6%) is submitted

personal decision : hold stock till 1st week of jan and sell @ 520 or higher as the chances of delisting happening are low.

Update 1/14
Price at start of buyback was 525. Buyback may not be successful
sold off at average price of 497.1 for 1.5 month gain of 7.2%

The deal values worked out as forecasted earlier. The price went up to around 520 and is now at 428. A 10-15% drop would make the stock attractive again.

The error in the idea was in estimating the probability of success of the deal. The deal success probability was much lower than expected. However due to the price action, the deal still turned out to be profitable.

There are several things which can go wrong. Always be conservative in estimating success of such special opportunities.

Follow price action of the stock to understand investor expectations of the deal and to make opportunistic gains. This is a new one for me as I rarely concern myself with such things for my long term ideas

Finally, it is profitable and a lot of fun to associate with smart people :)


Anonymous said...

Hi Rohit,

In the matrix where you have worked out the expected value - shouldn't the spread be 64.4 - (-34.5) = 98.9 ?

If so, the gain should be 3x6 or roughly 18% ???

Also, I feel there was some ambiguity in this post. Because I did not understand the bit about delisting. Could you pls. include some background on Elantas beck so that I can appreciate the math.


Anonymous said...

Oh Man !

Anon2 , oh man, you just screwed the equation !!!

Phew !

Rohit is right with the calculation but the post as you rightly pointed out is pretty vague :)

Rohit Chauhan said...

Hi anon1 and anon 2
yes i need to fix the post a bit. need to provide some more clarity

anon 1
the calculation is correct ..expected value is gain* probability of gain+ loss* probability of loss


Anonymous said...


This is not a comment for this post. I am writing here because there is no 'contact us' form or email-id to write to you.

I would like to request an analysis of Financial Technologies of India (www.ftindia.com) as I considering investing in it. There are hardly any analysts covering this despite this being a fast growing $1Bn company. Appreciate your consideration.

Best regards.