“Should City Union Bank be retained for 3 Months ex Rights ?” asks Rahul ~ Just became ex rights yesterday and is @ Rs 50 now

Hi Rahul ~ Your Question is quite interesting and I’m sure over 80000 shareholders of City Union Bank would like to know too !

On November 12,2012 I had blogged on a surging L & T Finance and it’s stake in CUB

Yo! L & T Finance Holdings Zooms 12.7 % To Close At Rs 72.40 Today ~ It Holds 4.68% Of City Union Bank (CUB) Which Is Cum Rights Rs 59.75

“Should you retain CUB ex rights for 3 months?”  is what you ask

The Answer depends on the Shareholder’s Risk Profile and whether the shareholder is comfortable with a Long Term Outlook on CUB

Of Course your Question is specific on the time Period ~ 3 Months

There are  Two Approaches to Consider here and assess their weightage in your decision making to immediately sell or hold CUB ex rights

  1. Immediate to two to three  months ex rights Impact on  Share Price  and  Traded Volumes because of the Rights Issue  ~ There will be some price pressure ex rights
  2. Assets and Earnings Valuation of  CUB and Interesting Shareholding Developments  going into 2013 ~ I will give more weightage to this  

Rational Thinking  and Maintaining Same Scrip Weightage Exposure in the Portfolio would guide you to adopt a strategy of  replacing existing original CUB holdings with  Cheaper Rights at Rs 20 ~ However the Rights Ratio is only  1: 4 and the Rights Pricing is attractive at Rs 20 and therefore it will not be possible to replace entire original holding as you may not get more shares than entitled even if you do apply for them ~ so you could adopt the strategy of selling 25% of your original holding now ex rights @ Rs 50 knowing you will be getting the same quantity in the Rights at Rs 20 ~ this will serve two objectives ~ Reduce your Holding Cost while maintaining  CUB weightage in your Portfolio 

The Risk you take here is that the Share Price of CUB actually will move up in 2013 from ex rights Rs 50 levels ~ This brings us to the Assets and Earnings Valuation  Assessment of CUB ~ Ex Right the Book Value drops to Rs 30 +and the FY 13 Projected EPS to Rs 5+ giving us relatives of P/BV of 1.6 and P/E of 10 ~Despite the Pressures on Margins and rising NPAs with such a huge FII Shareholding of over 21% of the Equity as well as L & T Finance  being the largest shareholder holding just under 5% in CUB,my sense is that 2013 will be a very interesting year

I would take a longer term view and give more weightage to continuing and sustainable valuations and the  interesting  shareholding developments that may take place in 2013 and beyond in CUB and would not sell CUB ex rights ~ Of course this would mean I’m increasing my shareholding in CUB through subscribing for the Rights and therefore also increasing the CUB weightage in my Portfolio

I suspect what most will do is to sell 1/4 th original holding right away ex rights at Rs 50 and replace these with the Rights Shares at Rs 20 ~ I also noticed heavy buying cum Rights at Rs 60 by those who are playing the Rights Game with  a  Financing and Fixed Return and Stag Mindset !  Their holding cost  will be Rs 52 /share => 4* 60 + 1*20 => 260/5=> Rs 52 ~ Therefore they may sell  when CUB moves to just Rs 55 and beyond to capture their  5 % absolute Interest Returns in the next  two to three months ~ Therefore in the Short Term there will be some Pressure on the CUB  Share Price ~ but will it drop towards Rs 40 ! ? I think one should take the risk it will not given the Valuations and Shareholding Situations that I’ve specified above read more