HDFC warrants rally 86% on strong HNI, institutional demand

Housing finance major HDFC Ltd is witnessing a sharp rally in the price of its convertible warrants, as HNIs and institutional investors are rushing to buy them to benefit from the price differential with the company's stock.

The warrants were selling at a price of Rs 68.20 a piece this afternoon -- marking a sharp appreciation of over 86% from its monthly low of Rs 36.6 in June, brokers said. The warrants can be converted into equity shares of HDFC Ltd at a price of Rs 600 per share, as against the prevailing stock price of Rs 672 each. After taking into account the cost of warrants (Rs 68.2 a piece currently), the investors can get the shares at a price of Rs 668.20 through conversion, which is Rs 3.8 a share less than the prevailing share price. Besides, the warrants would help the investor save about Rs 3 in terms of transaction costs associated with the direct purchase of shares and over Rs 11 a share in terms of interest costs, as immediate cash outgo would be much less -- taking the total savings to nearly Rs 18 or about 2.7%. Brokers said that the HNIs and institutional investors are opting to buy the warrants as they are required to pay for the warrant costs only as of now and the full payment for the shares would be required to be paid at the time of conversion. The warrants are being purchased with an intention to convert them later, as a result of which the share price has also risen from a low of Rs 601 to Rs 672 in about a month, while warrant prices have nearly doubled, brokers noted. HDFC had issued over one crore warrants along with non-convertible debentures in August 2009 at the conversion price of Rs 3,000 a piece based on the then face value of Rs 10 per share. Since then, the face value of the stock has been revised to Rs 2 per share, because of which the conversion price now stands adjusted at Rs 600 per share. Consequently, the total number of warrants had also increased to over five crore. A large number of warrants (close to 86 lakh) were converted last month, while nearly 4.6 crore warrants remain to be converted. The warrant holders can exercise the conversion option within three years from the date of allotment, with the due date falling next month on August 24, 2012. A large portion of HDFC shares and warrants is held by institutional and high net worth investors as reflected in the company's shareholding pattern. As they mostly invest with a long-term view, the institutional investors, including FIIs and domestic institutions, held 86% stake in HDFC, while retail investors owned most of the remaining 14% equity in HDFC as on June 15, 2012.