Tuesday, September 20, 2016

CASTROL: THE BLOCK DEAL AND BEYOND


It’s public knowledge now that the second tranche of promoter stale sale in Castrol was due. In fact last month, many traders were caught short anticipating the block deal that never took place and stock saw massive short covering.

Something interesting happened again here between yesterday and today. Lot of shorts got built yesterday anticipating the conventional wisdom of the block getting executed at a discount. In fact, yesterday there was some 40% jump in Open Interest and the stock fell 4%

Now, the interesting bit here which a lot of people have forgotten is that Castrol India has been a massive underperformer over last 2 years. In fact the way crude has fallen, this stock should have been a multibagger but actually over last 2 years, it fell some 28% for variety of reasons but the promoter stake sale was the main overhang.

So what happened this morning? The block deal book was launched at a price band of Rs 408-422. First thing in morning, the entire issue was underwritten by a single investor. Yes, a single investor was ready to commit Rs 1800 cr in Castrol. This led to a lot of protest by other investors who all wanted a pie of the share. After all, this is a global MNC, blue chip and a stock which has underperformed with potential to rally big and with knowledge that promoters won't sell any more now with stake down to 51%. So finally, merchant bankers had to drop the deal in the block window since the price in morning itself went much beyond the band and the demand was too huge. And hence the deal at a premium and once again shorts getting trapped.

What next? Well, looking at the appetite today and given it’s last 2 years of underperformance, if the stock has hit an inflection point, I won’t be surprised to see this stock running away to 550-600 and that too if you are conservative. Of course, this won’t happen tomorrow and the stock is bound to have periodic correction. But the market is offering you an interesting idea if you are willing to pay a minor premium over the recent price move!!

P.S – These are my first thoughts immediately after the deal and the feedback I have got. Please bear with me for typos, grammatical errors etc.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his employers as part of his compensation



5 comments:

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