Britannia’s Bonds are Tastier Than it’s Cookies

On March 2, my colleagues and I bought shares in Britannia at an average price of Rs 1,680 per share. Exactly one week later, on March 9, we sold all these shares at Rs 1,645. Why did we do this? We did it to create very cheap bonds in Britannia.

On 25 February, the company had fixed March 9 as the record date for its bonus debentures issue which had been announced way back in May 2009. One bond having a face value of Rs 170 per bond, a coupon of 8.25% p.a., and a maturity at par three years after issue was to be allotted for every one share held on the record date.

This is a form of a mini leveraged recapitalization. It’s not unusual for markets to ignore these corporate actions, and that’s what we were expecting. After all, given that the stock was selling at Rs 1,680, a carve-out of a security having a value of Rs 170 out of the equity of the company was only about 10% of the latter’s market value.

An operation like this involves buying the stock on a cum-entitlement basis, and selling it on ex-entitlement basis on the record date, hoping that the market would ignore the corporate action. Obviously, such operations are not without risk. After all, markets can crash over the one week holding period (and we did not put in a market hedge because the trade size was small). If this happened, we would have cursed our bad luck. However, we were not very concerned about this because of low volatility of this stock (it has a beta of 0.5), and the high quality of its business.

By buying the stock at Rs 1,680 on cum-entitlement basis and selling it for Rs 1,645 on ex-entitlement basis, our cost of creating a bond of Britannia turned out to be Rs 35 (i.e. 1,680 less 1,645). After considering trading costs, the effective cost of creating a bond of Britannia was approximately Rs 50. It’s fair value is Rs 170 given that the company is a very good credit risk, and the coupon offered is in line with AAA bond yields.

While Britannia cookies may be very tasty, its high-grade and very cheap bonds, are much tastier to a deep value investor!

19 thoughts on “Britannia’s Bonds are Tastier Than it’s Cookies

  1. Vishwa says:

    With such attractive returns, wondering why your trade size was small..Regards.

  2. Raunak says:

    ” It’s not unusual for markets to ignore these corporate actions, and that’s what we were expecting.”

    Why did you expect that the markets might ignore this?

    In a previous post about Titan industries, you had mentioned a similar state where markets had ignored a small dilution in equity.

    I am more interested to understand where this insight comes from?

  3. Curious says:

    Holy Cow !

    I saw the trade, tracked it but chickened out on Valuation, where is the value in Brittania ???

    What metrics work for it ?? The turnaround which seems to have gone on forever and the enchanting Miss Bali aside, I find it quite troublesome to get comfortable with the valuations

  4. Neeraj says:

    Dr.Reddy’s bonus debentures may be sweeter than its medicines..but nowhere as sweet as Britannia’s cookies! 😐
    Bonus debentures seem to be becoming the ‘in-thing’..
    cheers prof!

    • I agree Neeraj. The trading costs are too significant to make Dr. Reddy’s bonds attractive to acquire by buying the stock on cum basis and selling it on ex basis…

  5. addi says:

    on an ex basis the market price of britannia should have corrected approximately by the pv of the debentures. the above trade appears to be betting on the fact that on a future date(ex date) the markets would be grossly inefficient. isnt it a case of sheer good fortune that on an ex basis the price corrected by just Rs 35. whats been your experience w.r.t. other such special situations. are the markets always as inefficient.

  6. Luck always plays a role in worldly outcomes. In the past, my experience in such situations has been good. But the sample size of such transactions is too small to draw any meaningful conclusions.

    This was just one example of a relatively minor inefficiency. There are numerous examples of other far more glaring cases of market blindness.

  7. Curious says:

    Prof, is it that great an idea to bet a lot of money and then wait to make some little money hoping that you get lucky

    I thought luck was to be used the other way round

    But, HEY ! It worked, what can you say 🙂

    “This was just one example of a relatively minor inefficiency. There are numerous examples of other far more glaring cases of market blindness.” – Really, then maybe you can write about them and not the dicey ones 🙂

    But Miss Bali is quite enchating !

  8. Its never a great idea to bet a “lot of money” and then wait for luck to smile on you. That’s what gamblers do isn’t it?

    As mentioned in the original post, this was a small trade based on historical evidence. However, there were no surety it would work this time. Things that have worked in the past, need not always work in the future. But they may still be worth trying…

    • special_situations says:

      Hi Prof,

      good risk arbitrage in britannia ltd.
      hope you are keeping an eye on zee news ltd, and zee ent ltd.

      I feel there might be a decent risk arb. in that case too.

      thanks for the great work, ur articles are knowladge enhancers in practical world.

      good luck

  9. Curious says:

    Point Taken !

    Maybe there is some advantage to having more of this “experience” thing after all 🙂

    Thanks for the Reply

  10. Vijay says:

    Hi Professor ,
    Could you please tell us where you track such information from ? Any website in particular ? Thanks in advance!

  11. AJ says:

    It surely must have something to do with your understanding of the general market behaviour. Please share what led you to believe that the markets would miss such publicly available information?

  12. special_situations says:

    dear sir,

    i think your ideas are wonderfull and the amount of knowladge you possess is gr8.

    i finished off reading a book recommended by you, “illusion of control”.

    the comparision of chimps with stock analyst was a good one, and the role of luck in life was worth reading and understanding.

    plz share some more insight on these subjects.

    also read ” dance with chance”

    both are very similar

    bakshi sir , i could not understand a word in a book ” god is my broker”. may be dont have the indepth knowladge as yours.

    if you would like to share some insight on it plz do so.

    thanking you in anticipation.

    for the guys following the blog, kirloskar oil engines and kalyani steel have announced their record dates for demerger.

    so vijay you can find the info on
    and, go to the announcement sections.

    hope that will help you out


  13. special_situations says:

    hi , the record date for rpg cables and kec international is announced , 19 apr.

    for every 20 shares of rpg cables a share holder will get 1 share of kec intl. ltd.

    so no margin in that.

    one can keep an eye on monnet ispat and mountevrest trading ltd merger

    the swap ratio is :

    for every 5 shares held in mountevrest trading we would be getting 2 shares of monnet ispat.

    5 shares of mount ever trading will cost rs 790
    2 shares of monnet ispat value is rs 880.

    not a bad deal bad (i think).

    the high court approval will take atleast another 6/7 months, hence waiting time is significant.

    one can wait a bit and take a call around when the high court approal is obtained. (if this kind of return is there even then).


    • Curious says:

      You do not do special situations with over valued equity

      The only way this would happen was if you could lock in the spread, do not know whether it is possible

      Lastly, do not advise on this blog about equity situations, especially if you do not have rock solid rationale backing it !

  14. Shankar Nath says:


    On a lighter note, I noticed you mentioned Britannia’s beta of 0.5. Since when did you start ascribing to the CAPM? Thought we had a small funeral with your ‘Death of Beta’ lectures.


  15. yatin says:

    Your bet turned in your favor. You took risk and based upon informational asymmetry you earned a handsome return. Investors should note that the return was not on account of arbitrage.

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