My article at Yahoo: Good Stock. Bad Stock.
(Reproduced in full)
Tata Steel showed some gutsy results in the last few quarters, with phenomenal year-on-year growth in their net profits. As western economies have recovered (ever so slightly) the Corus acquisition has helped them in scaling up.
But, the impact of such results for investors has been less than stellar. When Tata Steel announced the Corus acquisition in early-2007, it decided to finance that acquisition through a rights issue and compulsorily convertible preference shares (CCPS), sold to existing investors. The Rights issue allowed an investor with 5 shares to buy one more at Rs. 300 per share. The CCPS was priced at Rs. 100 per share, convertible in 2009 at 6 CCPS to one equity shares, valuing the equity share at Rs. 600 then.
This sounded cheap! The stock price in November to December 2007 — the dates of the rights issue - was between Rs. 800 and 900, much higher than any of the rights or convertible prices. In fact, just the rights issue would have taken your purchase price to the Rs. 750 levels. And the CCPS at 600 looked juicy.