DB09051 - Financial Markets - BirlaCotsyn - Base Version

BIRLA COTSYN INDIA LTD.
Batch : PGCBM-16
Name of the Project : Birla Cotsyn India Ltd.
Course : Financial Markets
SMSID : DB09051
SID : 2215293
Study Center : Anna Nagar, Chennai
FM&B Page 1
Table of Contents
Table of Contents.............................................................................................................................................2
1. Objective.......................................................................................................................................................3
2. Scope.............................................................................................................................................................3
3. Public Offerings ...........................................................................................................................................3
3.1 Introduction.............................................................................................................................................3
3.2 Need for Public offering.........................................................................................................................3
3.3 IPO details..............................................................................................................................................4
3.4 Book Running Lead managers/Syndicate Members...............................................................................5
3.5 Share holding pattern..............................................................................................................................8
3.6 Underwriting...........................................................................................................................................9
3.7 Issuing Type............................................................................................................................................9
3.8 Important Dates....................................................................................................................................10
3.9 Allotment Details..................................................................................................................................10
3.10 Share value after Issue close date ......................................................................................................11
3.11 Observations/Comments ....................................................................................................................12
4. Options and Futures....................................................................................................................................13
4.1 Options..................................................................................................................................................13
4.1.1 Call Option.....................................................................................................................................13
4.1.2 Put Option......................................................................................................................................16
4.1.3 Strategies........................................................................................................................................18
4.2 Real Options.........................................................................................................................................19
4.3 Futures..................................................................................................................................................19
5. References...................................................................................................................................................21
FM&B Page 2
1. Objective
The main objective of this assignment is to study on the public offerings of Birla Cotsyn India
Ltd., a Yash Birla Group company. The additional objectives is to study Options, Real Options,
Futures, Convertibles, Warrants and other Hybrid securities of Birla Cotsyn or of a company in
the same Industry.
2. Scope
The scope of this case study is to analyze only the public offerings made by Birla Cotsyn in the
recent past and comment on the same. The case study shall also discuss in detail on F&O listed
on NSE of Century Textiles, a major player in textile Industry.
3. Public Offerings
3.1 Introduction
Birla Cotsyn was setup in the year 1941on 24th day of September. The name by that time was
Jamod Ginning Company Private Ltd. The company was re christened as Birla Agro private Ltd
in the year 1998, 8th October. Finally, in the year 2005 on 9th December, the company got its
name- Birla Cotsyn India Private Ltd. It attained the status of a Public Limited Company on the
30th day of May, in the year 2006 under the present name of Birla Cotsyn India Ltd.
3.2 Need for Public offering

Birla Cotsyn had a proposal to expand the Integrated Textile plant, set up a
garment manufacturing plant and also to establish retail outlets at an
aggregate cost of Rs 32,020 lakhs. In order to raise the necessary fund for
the business enhancement, Birla Cotsyn planned to go public.
The split-up cost of the business expansion is as follows:

Project Cost (In Lakhs) % of Total cost % of Issue proceeds
Integrated 28,919 90.31 78.50
textile plant
Apprrel 2,521 7.87 17.48
manufacturing
Unit
FM&B Page 3
Retail outlets 580 1.81 4.02
Total 32,020 100 100
The company plan to raise the fund through Term loans, Equity/Promoters contribution and
Subsidy.
Of the total Equity requirement for the entire project of Rs.16,353 Lakhs, the promoters have
brought in Rs 5,704.07 lakhs for implementation of the project. Of this promoter’s contribution,
an amount of Rs 1939.50 lakhs has been converted into equity and the rest is proposed to issue
shares for the remaining amount of Rs.3,665 Lakhs. Finally Birla Cotsyn proposed to raise Rs
14,418 lakhs from the proposed issue which includes Rs.3665 lakhs of above mentioned
promoter’s contribution, employee reservation portion and the net issue to public.
Fund plan Proposed by the company:

S. No. Particulars Amount (In Lakhs)
1 Term Loan 15,459.00
2 Equity 16,353.00
Public / Promoters Contribution
3 Subsidy 208.00
TOTAL 32,020.00
3.3 IPO details

Birla Cotsyn went with an “Initial Public Offering” of 10,29,82,729 Equity
Shares Of Rs. 10/- Each for cash at a Price of Rs. 14/- Per Equity Share
aggregating to Rs. 14,418 Lakhs (Hereinafter Referred To As The “Issue”) .
The Issue comprises promoter’s Contribution of 2,61,75,587 Equity Shares of

Rs. 10/- Each for cash at a price of Rs. 14/- Per Equity Share aggregating to
Rs. 3,665 Lakhs (Hereinafter Referred To As Promoter’s Contribution) and
Employee Reservation Of 51,78,571 Equity Shares of Rs. 10/-Each for cash on
competitive basis at a price of Rs. 14/- Per Equity Share aggregating Rs. 725
Lakhs (Hereinafter Referred to as the “Employee Reservation Portion”). The
Issue less The promoter’s contribution and Employee Reservation Portion is
referred to as Net Issue to Public (Hereinafter Referred to as “The Net Issue”
Or “Net Issue to the Public”). The Net Issue would constitute 69.55%.
Equity Share Split-up

Equity Share Details
1. Promoters Contribution 2,61,75,587 Equity Shares of Rs.10 each for
cash at a price of Rs 14/-aggregating
Rs.3665.00 lakhs.
2. Employee Reservations 51,78,571 Equity Shares of Rs.10 each for cash

on competitive basis at a price of Rs 14/-
aggregating Rs.725.00 lakh.( Allocation on
proportionate basis)
FM&B Page 4
3. Net Issue to the Public 7,16,28,571 Equity Shares of Rs.10 each for
cash at a price of Rs 14/-aggregating
Rs.10028.00 Lakhs
TOTAL 10,29,82,729 Equity Shares of Rs.10 each for
cash at a price of Rs
14/- aggregating Rs.14418.00 lakhs.
Net- Issue Split-up
Net-Issue Details
A. Qualified Institutional buyers Upto 3,58,14,285 Equity Shares of Rs.10 each
for cash at a price of Rs 14/-aggregating upto
Rs.5014.00 lakhs.
Constituting upto 50% of the net issue to the
Public (allocation on proportionate basis)
(i) Out of which 5% i.e. 17,90,714

Equity Shares of Rs.10 each for
cash at a price of Rs 14/-
aggregating Rs.250.70 lakhs will
be available for allocation to
Mutual Funds only
(ii) The remaining QIB portion will be
available for allocation to QIBs,
including Mutual Funds.
B. Non-Institutional Portion At least 1,07,44,285 Equity Shares of Rs.10
each for cash at a price of Rs 14/- aggregating
Rs.1504.20.Lakhs constituting minimum of
15% of the net issue to the Public. (allocation
on proportionate basis)
C. Retail Portion At least 2,50,70,000 Equity Shares of Rs.10
each for cash at a price of Rs 14/- aggregating
Rs.3509.80 Lakhs constituting atleast 35% of
the net issue to the Public (allocation on
proportionate basis)
3.4 Book Running Lead managers/Syndicate

Members
The Book Running Lead Managers:
FM&B Page 5
Registrar to the issue:
Co-Book Running Lead Mangers:
Co-Book Running Lead Managers
NEXGEN Capitals Limited

SEBI Regn. No: INM000010999
9-B, Netaji Subhash Marg,
Daryaganj,
New Delhi-110 002
Tel: 91 11 3011 1333
Fax: 91 11 3088 8866
Email: bcil.ipo@nexgencapitals.com
Website: www.nexgencapitals.com
Saffron Capital Advisors Private Limited

SEBI Regn . No: INM 000011211
Ground floor, VILCO Centre,
Subhash Road, Behind Garware,
Vile Parle ( East)
Mumbai – 400057
Tel: +91-22 26820654
Fax: +91-22 26820502
Email: bcil.ipo@saffronadvisor.com
Website: www.saffronadvisor.com
FM&B Page 6
Chartered Capital And Investment Limited
SEBI Regn . No: INM000004018
711, Mahakant, Opp.V.S. Hospital
Ellis Bridge,
Ahmedabad -380006
Tel: 91 79-26577571,26575337
Fax: 91 79-26575731
Website: www.charteredcapital.net
Email: info@charteredcapiital .net
Syndicate Members:
Syndicate Members
SMC Global Securities Limited
SEBI Regn. No : INB/INF230771431
9-B, Netaji Subhash Marg,
Daryaganj,
New Delhi-110 002
Tel: 91 11 3011 1333
Fax: 91 11 3088 8866
Email : rakesh@smcindiaonline.com
Website : www.smcindiaonline.com
Contact Person: Mr.Rakesh Gupta
Aryaman Financial Services Ltd
SEBI Reg. No : INM000006807
306-307, Mint Chambers, 45/47, Mint Road,
Fort,
Mumbai – 400 001
Tel. : 91 22 22618264/ 69
Fax : 91 22 22630434
Email : info@afsl.co.in
Website : www.afsl.co.in
Saffron Global Markets pvt Limited

Ground floor, VILCO Centre,
Subhash Road, Behind Garware,
Vile Parle (East) Mumbai – 400057
Tel: +91-22 26820654
Fax: +91-22 26820502
Email: bcil.ipo@saffronadvisor com
Website: www.saffronadvisor.com
Contact Person: Mr. Sourabh
FM&B Page 7
3.5 Share holding pattern

The details of the share holding pattern before and after the issue are as follows:
It is observed from here that the promoters hold only 34.13 percent of the total stake once this
Issue is closed.
FM&B Page 8
3.6 Underwriting
Birla Cotsyn went for fully underwritten agreement where the BRLMs are made responsible for
bringing in the amount.
Name Number of Equity Amount

Shares to be Underwritten (In
Underwritten Lakhs )
Allbank Finance 714,285 100.00
Ltd.
NEXGEN 178,57,142 2500.00
Capitals Ltd.
Saffron Capital 25,00,000 350.00
Advisors
Private Limited
Chartered 178,57,142 2500.00
Capital And
Investment
Limited
SMC Global 178,57,142 2500.00
Securities
Limited
Aryaman 25,00,000 2500.00
Financial
Services Ltd
Saffron Global 175,21,331 350.00
Markets pvt
Limited
Reliance 100 -
Securities
Limited
Total 768,07,142 10800.00
3.7 Issuing Type
FM&B Page 9
Birla Cotsyn went with Dutch auction underwriting. The Initial price band was set to Rs. 15/- TO
Rs. 18/- PER EQUITY SHARE of FACE VALUE of Rs. 10/- Each. Later the Price band was
revised to Rs. 12/- TO Rs. 14/- PER EQUITY SHARE of FACE VALUE of Rs. 10/- Each on
July 4, 2008 and the closing date is extended till July 09, 2008.
Based on the final submitted bids, the price was set to Rs. 14/- PER EQUITY SHARE of FACE
VALUE of Rs. 10/- Each. The Final Demand at different bid prices is as follows:
Bid Price No. of % to Cumulative Cumulative %
Shares Total Total to Total
12 102550 0.1 105105887 100
13 6300 0.01 105003337 99.9
14 78839387 75.01 104997037 99.9
15 96250 0.09 26157650 24.89
16 22400 0.02 26061400 24.8
17 10850 0.01 26039000 24.77
18 3081050 2.93 26028150 24.76
CUT OFF 22947100 21.83 22947100 21.83
3.8 Important Dates

Draft Offer documents filed with SEBI – December 27, 2007
Red Herring documents filed with SEBI –July 04, 2008
Final offer documents filed with SEBI – July 25, 2008
Issue Open date – June 30, 2008
Issue Close date – July 09, 2008 (Originally to close on July 4, 2008, Extended later on)
NSE and BSE Listing – July 30, 2008
3.9 Allotment Details

The Issue received 15610 applications for 80201750 equity shares. The details of the applications
received in the Issue from EMPLOYEES, QIB, NON INSTITUTIONAL AND RETAIL
INDIVIDUAL INVESTOR categories are as under: (Before technical rejections)
Category No. of No. of Subscription

Applications Shares
EMPLOYEES 19 165900 0.032
NON 67 55875750 5.2005
INSTITUTIONAL
INVESTORS
QUALIFIED 1 555800 0.0155
INSTITUTIONAL
INVESTORS
RETAIL 15523 23604300 0.9415
INDIVIDUAL
INVESTORS
TOTAL 15610 80201750 1.11
FM&B Page 10
Total Subscription = No. of Equity shares applied / (No. of Equity shares * Net Issue
contribution)
= 80201750/(102982729 * 69.55%)
= 1.11
So the issue is oversubscribed 1.11 times.
The day by day subscription of Birla Cotsyn is given below for reference:
Bidding Status (IPO No. of times issue is subscribed
Subscription day by day) (BSE + NSE)
As on Date QIBs Non Inst Retail Empl. Total
Day 1 - 30-Jun-2008 17:00:00 0.017 0.3323 0.0181 0 0.06
IST
Day 2 - 01-Jul-2008 17:00:00 0.017 0.7198 0.3381 0 0.22
IST
Day 3 - 02-Jul-2008 17:00:00 0.017 1.1629 0.5073 0 0.34
IST
Day 4 - 03-Jul-2008 17:00:00 0.017 1.1646 0.5499 0.0029 0.35
IST
Day 5 - 04-Jul-2008 17:00:00 0.017 1.4633 0.9038 0.0275 0.51
IST
Day 6 - 07-Jul-2008 17:00:00 0.013 1.4065 0.7263 0.0221 0.44
IST
Day 7 - 08-Jul-2008 17:00:00 0.013 3.1167 0.7394 0.041 0.69
IST
Day 8 - 09-Jul-2008 17:00:00 0.013 5.7497 0.9164 0.0415 1.11
IST
3.10 Share value after Issue close date

The Birla Cotsyn stock price went down by 30% on the first day of trade and it never hit the offer
price of Rs.14. The stock price keep falling till the price reached Rs. 4 and it keep on fluctuating
around Rs. 4. Later Birla Cotsyn split the Face Value from Rs.10 to Rs.1 effective from October
23, 2009.
FM&B Page 11
3.11 Observations/Comments
• For the Initial Price band of Rs.15 to Rs.18, the total subscription was only 35% as on 4th
July, 2008. Later the price band is modified to Rs. 12 to Rs.14 and the Issue close date is
extended from 4th July to 9th July.
• Even though the Issue close is extended for a period of 5 days, the overall subscription
seems to be pretty low.
FM&B Page 12
• The Percentage of stake hold by the promoters of Birla Cotsyn is 34.13 only which is not
a good sign.
• Birla Cotsyn split the Face Value from Rs.10 to Rs.1 effective from October 23, 2009.
• EPS of Birla Cotsyn went even low after the Face value split up and this is not considered
to be a good sign.
• After Face value spilt up, Birla Cotsyn is considered to be a penny share
• This stock is not held by any Mutual Fund
4. Options and Futures

Birla Cotsyn stock doesn’t have Options and Futures trading. Century Textiles, a player in the
same industry is considered for study of Options and Futures.
4.1 Options
An option is a contract giving its owner the right to buy and sell an asset at a fixed price on or
before a given date.
4.1.1 Call Option

A call option gives the owner the right to buy an asset at a fixed price during a particular period.
Below mentioned are few call options of Century textiles listed on NSE. All the listed call options
are “Call American”, where the option may be exercised anytime up to the expiration date. The
other type of call option available is “Call European, where the option can be exercised only on
the expiration date.
Number
Turnover
Instrument Expiry Option Strike High Low Prev Last of Underlying
Underlying in Rs.
Type Date Type Price Price Price Close Price contracts Value
Lakhs
traded
25-
Feb-
OPTSTK CENTURYTEX 10 CA 460 5.4 5.4 45 5.4 4 15.79 471.45
25-
Mar-
OPTSTK CENTURYTEX 10 CA 480 20 15.1 72.15 19.95 3 12.68 471.45
The expiration date for all the call options is 25th Feb, 2010. The exercise price of the one call
option is Rs. 460 and the other is Rs. 480.
The following are certain factors that determine the call option values:
• Exercise price
Higher the exercise price, lower the Call option value
• Expiration date
Higher the expiration period, Higher the call option value
• Stock Price
FM&B Page 13
Higher the stock price (Value of underlying asset), Higher the call option value
• Volatility
Higher the volatility, Higher the call option value
• Interest Rate
Higher the interest rate, higher the call option value
Given below is the quote of Century Textiles for Call American:
The Intrinsic value of an option shall be calculated by feeding the options determinants in the
Black-Scholes calculator:
• Stock Price : 468.10

• Strike Price : 470.00
• Interest Rate : 7.5%
FM&B Page 14
• Expiry Time : 2 days
• Annualised Volatility : 55.83%
The Intrinsic value calculated using the Black-scholes calculator on www.tradingtoday.com site
is Rs. 6.9077
Annualized Volatility:
The volatility value plays an important role while determining the Intrinsic value. Volatility is
defined as the variation or dispersion or deviation of an asset’s returns from their mean.
Sample example (only 5 samples) of Volatility calculation in Excel using logrelative method:
Date Closing value (CV) Logrelarive Std Deviation Volatility

24-Feb-09 153.7
25-Feb-09 172.8 0.117132206
26-Feb-09 178 0.029648694
27-Feb-09 179.1 0.006160759
2-Mar-09 173.75 -0.030326825 0.062711 0.140226
Step-1: Calculate the log relative values

Log relative value on 25-Feb-09 is ln( CV 25-Feb/CV 24-Feb)
Step-2: Calculate the Standard deviation
Standard deviation value is stdev(all log relative values)
Step-3: Calculate the Volatility
Volatility is calculated using formula: standard deviation value * Sqrt(no. of samples-1)
FM&B Page 15
Annualized Volatility rate calculated for Century Textiles using the logrelative method described
by A.A.Kotze is 58.84% (close to the value specified in NSE Quote). ( Stock closing dates from
24-Feb-2008 to 24-Feb-2010 are used for calculation) . Refer below excel for more details.
CENTURYTEX -
Annual volatility calculation.xls
4.1.2 Put Option

A put option gives the owner the right to sell an asset at a fixed price during a particular period.
Below mentioned are few put options of Century textiles listed on NSE. All the listed put options
are “Put American”, where the option may be exercised anytime up to the expiration date.
Number
Turnover
Instrument Expiry Option Strike High Low Prev Last of Underlying
Underlying in Rs.
Type Date Type Price Price Price Close Price contracts Value
Lakhs
traded
25-
Feb-
OPTSTK CENTURYTEX 10 PA 450 7.5 7 16.25 7.5 80 310.27 471.45
25-
Feb-
OPTSTK CENTURYTEX 10 PA 460 1 1 10 1 2 7.82 471.45
The expiration date for all the put options is 25th Feb, 2010. The exercise price of the one put
option is Rs. 450 and the other is Rs. 460.
The following are certain factors that determine the put option values:
• Exercise price
Higher the exercise price, higher the put option value
• Expiration date
Higher the expiration period, Higher the put option value
• Stock Price
Higher the stock price (Value of underlying asset), Lower the put option value
• Volatility
Higher the volatility, Higher the put option value
• Interest Rate
Higher the interest rate, lower the put option value
Given below is the quote of Century Textiles for Call American:
FM&B Page 16
The Intrinsic value of an option shall be calculated by feeding the options determinants in the
Black-Scholes calculator:
• Stock Price : 471.45

• Strike Price : 450.00
• Interest Rate : 7.5%
• Expiry Time : 1 day
• Annualised Volatility : 55.83%
The Intrinsic value calculated using the Black-scholes calculator on www.tradingtoday.com site
is Rs. 0.3124
FM&B Page 17
4.1.3 Strategies
Protective Put:
The strategy of buying a put and buying a underlying stock is called a protective put.
Below given are the open market value and Option of a Century Textile listed on NSE (As on
date 25th Feb 2010).
Open
Instrument Expiry Option market Last Total
Underlying Lot Size
Type Date Type /Strike Price Price/Position
Price
25-Mar- 464.65
NSE CENTURYTEX 10 N/A (Open) 464.65 848 394023.2
25-Mar- 460
OPTSTK CENTURYTEX 10 PA (Strike) 20 848 16960
The Investment required for this position is: (464.65*848) + (20*848) = Rs. 410983.2
The breakeven point of protective put in this case is the sum of open price and cost of put
option. i.e. Breakeven Price = 464.65 + 20 = Rs. 484.65. This is the starting price from which the
protective put starts giving profit.
Advantages & Disadvantages:

The protective put strategy will limit the maximum loss and at the same time the upside
maximum profit is unlimited. The disadvantage is that the cost of put option eats into the profit.
Protective put is used mainly when a person has underlying stock of a company and wanted to be
on the safer side and avoid huge loss.
FM&B Page 18
4.2 Real Options

It is observed from Birla Cotsyn Red herring prospectus that as per ESOP plan 2007, the grant of
options to employees was authorized.
As per the ESOP, the options granted would vest over a period of Six years from the date of
Grant. The employees of the company who have been covered under this plan have a period of 5
years from the date of vesting to exercise the options that would vest.
The intrinsic value of the option shall be calculated using Black-Scholes calculator by placing the
exercise price, current market price, volatility of stock, risk free rate and exercise time( i.e. 5
years from now).
4.3 Futures
Futures contract is a forward contact which specifies that a certain commodity will be exchanged
at a specific time in the future at a price specified today.
Below mentioned are few futures contracts of Century textiles listed on NSE:
Number
Turnover
Instrument Expiry High Low Prev Last of Underlying
Underlying in Rs.
Type Date Price Price Close Price contracts Value
Lakhs
traded
25-
Feb-
FUTSTK CENTURYTEX 10 477.4 465 467.6 472 2603 10406.3 471.45
25-
Mar-
FUTSTK CENTURYTEX 10 478 466.7 467.6 473.05 1712 6854.56 471.45
Given below is the quote of Century Textiles for Futures contract:
FM&B Page 19
The open interest of the Futures contract is 17.6%, market lot size is 848.VWAP is 471.44 and
the settlement price is 472.55.
Derivatives:
It is observed from the annual report of Century Textiles that it makes use derivatives to reduce
the variability of firm cash flows. As major chunk of revenues for Century textiles is through
exports, It is good to include derivatives keeping in mind the market fluctuations happening
frequently over time.
FM&B Page 20
5. References
http://www.sebi.gov.in/
http://www.nseindia.com/
http://www.nse-india.com/content/circulars/cmls13252.html
http://www.cmlinks.com/pub/ba/bashow.asp?code=28612
http://indian-stock-market-news.blogspot.com/2008/07/birla-cotsyn-ipo-finally-
oversubscribed.html
http://indian-stock-market-news.blogspot.com/2008/07/birla-cotsyn-extends-ipo-closing-
date.html
http://economictimes.indiatimes.com/investors-guide/Birla-Cotsyn-IPO-expensive-at-
offer-price/articleshow/3178690.cms
http://www.optionvueresearch.com/webtools2/FairMarketValueCalculator.asp
http://www.money-zine.com/Calculators/Investment-Calculators/Black-Scholes-
Calculator/
http://www.bseindia.com/cirbrief/new_notice_detail.asp?noticeid={E541551D-F9F5-
409C-9E28-64538828BD56}noticeno=20080729-
6&dt=7/29/2008&icount=6&totcount=25&flag=0
http://www.nseindia.com/companytracker/cmtracker.jsp?
symbol=BIRLACOT&cName=cmtracker_nsedef.css
Stock Price Volatility: a primer – by Dr. A.A.Kotze
FM&B Page 21

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BIRLA COTSYN INDIA LTD.

3.2 Need for Public offering

The split-up cost of the business expansion is as follows:

Fund plan Proposed by the company:

3.3 IPO details

The Issue comprises promoter’s Contribution of 2,61,75,587 Equity Shares of

Equity Share Split-up

2. Employee Reservations 51,78,571 Equity Shares of Rs.10 each for cash

Net- Issue Split-up

(i) Out of which 5% i.e. 17,90,714

3.4 Book Running Lead managers/Syndicate

The Book Running Lead Managers:

Registrar to the issue:

Co-Book Running Lead Mangers:

Co-Book Running Lead Managers

NEXGEN Capitals Limited

Saffron Capital Advisors Private Limited

Saffron Global Markets pvt Limited

3.5 Share holding pattern

Name Number of Equity Amount

3.7 Issuing Type

3.8 Important Dates

3.9 Allotment Details

Category No. of No. of Subscription

3.10 Share value after Issue close date

4. Options and Futures

4.1.1 Call Option

Given below is the quote of Century Textiles for Call American:

• Stock Price : 468.10

Date Closing value (CV) Logrelarive Std Deviation Volatility

Step-1: Calculate the log relative values

4.1.2 Put Option

Given below is the quote of Century Textiles for Call American:

• Stock Price : 471.45

Advantages & Disadvantages:

4.2 Real Options

Given below is the quote of Century Textiles for Futures contract:

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