ADS buzz prop for counters

Surprised by the huge domestic interest in scrips of companies planning a sponsored American depositary shares (ADS) issue?

Investors have been actively buying shares of companies with imminent plans for floating ADS or going in for stock buy-backs in the hope of a potential arbitrage opportunity.

Scrips of companies such as Infosys Technologies, Wipro, Satyam Computer, Bharti Tele-Ventures and ICICI Bank have seen their share prices surge in the last few weeks, brokers said.

Amitabh Chakraborty, head of research at Kotak Securities, said "Domestic investors take an arbitrage opportunity at the time of a sponsored ADR issue. They buy the shares in the local market and tender it at the time of the ADR issue, gaining on the premium offered in the ADR."

Arun Kejriwal, investment strategist at Angel Broking, said, "Investors are lapping up shares of companies floating sponsored ADRs because there is virtually no downside in such shares. Wherever there is a risk involved, they have an exit route using derivatives. The reverse arbitrage opportunities are also high."

In the last one month the ICICI Bank stock has gained 7.01 per cent from Rs 350 to Rs 374.85, the Infosys Technologies scrip price has appreciated 6.72 per cent from Rs 1970.95 to Friday's close of Rs 2103.30.

The Satyam Computer stock has gained 10.41 per cent from Rs 371.65 to Friday's close of Rs 410.35, while the Wipro stock has appreciated 3.27 per cent to Rs 695.45.

Nandan Chakraborty, head of research at Enam Securities said "Investors have also been buying into many of these companies because of their strong fundamentals/valuations and limited downside. The base prices are protected to an extent due to imminent ADRs/stock buybacks, he added.

Market sources said that large funds have also been buying into such counters because of their potential upside.

An institutional dealer with a domestic broking firm added, "There is a mis-match between the ADR and Indian prices of technology companies. The Infosys, Wipro and Satyam ADRs are all trading at nearly 50-60 per cent premium over their Indian stock prices. With the sponsored ADR, the liquidity also increases in the overseas market, allowing for larger participation of global investors."

Traditionally there is always a premium between the price of the Indian and foreign paper, he added.

The head of equity sales with a domestic broking firm said the software sector has been witnessing strong volume growth on the back of outsourcing demand.

"Further, billing rates have remained stable. Smart gains in frontline tech stocks have spilled on to the entire tech sector," he said.