Vijay Kedia is obviously, like the rest of us, a devoted fan of Rajnikanth, the legendary superstar. Kedia is so inspired by Rajnikanth that he equated India to “Kabali”, the superstar’s latest blockbuster movie.
India is like 'kabali' in the world' s economy. https://t.co/xheIlRuuuk
— Vijay Kedia (@VijayKedia1) July 22, 2016
In response, one of Vijay Kedia’s ardent and quick-witted fans, equated Karnataka Bank, one of Kedia’s favourite stocks, to “Kabali”, implying that the Bank would prove to be as much of a blockbuster as its namesake.
— Mehul (@mehul23mrk) July 23, 2016
Vijay Kedia’s logic for investing in Karnataka Bank proves Warren Buffett’s advice that “investing is simple but not easy”. Sometimes the simplest ideas make for the best investments.
Kedia explained that the “simple reason” he bought Karnataka Bank is because “it is a mid-cap bank with a good management, a 100 years old, a good dividend yield”. He also pointed out that the Bank is quoting at a rock-bottom valuation of 0.5x book. He emphasized that “the company is doing well, growing 16-18 per cent year-on-year, has a Rs 80000 crore business now projecting to touch Rs 200,000 crore by 2020”.
Now, in a sensational turn of events, investors in Karnataka Bank have the opportunity to rake in a fabulous 66% gain in just three months thanks to an “arbitrage opportunity” arising from its rights issue.
Jignesh Shah of Capital Advisors, a leading stock market expert, has formulated the theory that if investors buy 4,000 shares in the cash market at the current price, apply for the rights issue to get another 2,000 shares and go short on one lot of 6,000 shares in the September future series, they stand to make a whopping gain of 66%.
(Image Credit: ET)
Jignesh Shah also explained that the cost of buying shares from the cash market and applying for the rights issue would be Rs 7 lakhs. The investor would have to pay a margin for going short on Karnataka Bank stock futures, which would cost him another Rs 1-1.5 lakhs.
So, while the total cost of the transaction could be around Rs 8-8.5 lakhs. “This is a clear arbitrage strategy where investors can immediately lock in their profits,” Jignesh Shah said with immense confidence in his voice.
However, some astute investors are not convinced by Jignesh Shah’s theory.
— Nooresh Merani (@nooreshtech) August 11, 2016
The author of this article should be fired and ET sued! There is no such arbitrage! https://t.co/UazxI90AQF
— Vijay Pahwa (@Wealth_Park) August 11, 2016
Woke up to this article https://t.co/a1RNCu0Xdv Hilarious, No rights issue price/lot adjustment?? Muft ke 66%?
— Prem (@StocksResearch) August 11, 2016
Looks like someone is going to loose his job today due to the fiasco published in a leading newspaper for Karnataka Bank. Proofread boss!
— Amit Kumar Gupta (@amitgupta0310) August 11, 2016
Even the punters at MMB are not impressed. No one is scrambling to buy the stock nor is there any other excitement at the counter. “TOTALLY A HOPELESS SCRIPT” raj481 proclaimed, frustrated at the lack of movement in the stock.
So, in the light of the difference in opinion amongst the astute investors, novice investors like you and me would do well to hold our horses and look before we leap because if Jignesh Shah’s opinion suffers from a fallacy, neither Vijay Kedia nor Rajnikanth will be able to save us from disaster!