Bharti Airtel’s Rs 21,000 crore rights issue opens today and will close on October 21. The company is planning to issue one rights share for every 14 shares held and Bharti shareholders will have the opportunity of getting this rights share at a price of Rs 535 rupees apiece, which is almost a 20-25 percent discount from the current market price.

A note by IIFL Securities states that Bharti Airtel's partly paid-up rights issue is going to be akin to a in-the-money call option. Sriram Velayudhan, VP-Alternative Research of IIFL Securities, is in favour of this and would subscribe to the issue.

Sharing his rationale for it, Velayudhan said, "The beauty about partly paid-up rights issue is that if I want to express my long view on Bharti Airtel then holding a partly paid-up share will be one of the lucrative ways to do that. So what it does is that it not only lightens up the capital allocation, for instance, if I want to hold Bharti Airtel share then I would have to shell out Rs 680 based on yesterday's closing, the best part about partly paid-up is, I will be able to do the same, in almost half the deployment and therefore, I can utilise that capital and put it to use somewhere else. So already, after we pay the first call, the strike price I would consider would be Rs 402, assuming Bharti Airtel's prices stay firm for the next three years because three years is the duration that they had put up in the first announcement, and so it would be akin to deep in-the-money call for me at this point in time,” explains Velayudhan.

When asked if Bharti Airtel was a buy for him at Rs 680, he said the sector as a whole has come out of a decade-long consolidation. "So, when I look at it from an alternative perspective, my sense is this stock definitely has got more steam, because after the rights issue announcement came, all the right noises started coming out," he said.

“So from a technical perspective, the stock has given multi-month, multiyear breakout. Purely based on momentum, I don't see this rally fizzling out that easily. The partly paid-up share provides me the right platform to express my long view on Bharti Airtel," he added.

He further said, “We have different strategies for different sets of investors. So in one of our analysis, what we had pointed out is that Bharti is a frontline name, so ideally, as a partly paid-up instrument now, that weight of Bharti will get added in the index after the rights become fully paid-up, but it won't directly get reflected in the index. There is another option, if they want to match it up with the view of the active managers, they can do that intra-transfer but if I want to put a decent chunk from the passive guys. Secondly, this puts into perspective, the active fund managers' strategy.”

“Ideally, what the active guys can do is, if they are underweight at this point in time and if they want to go equal weight or overweight, buying the renunciation form, applying for the first call would be an ideal strategy. Thirdly, the arbitragers can buy the renunciation forms, short the relevant month futures. Therefore, let us assume the prices stay firm and a decent chunk of absolute gains can be made when the partly paid-up shares get listed,” he further explained.

For the entire discussion, watch the accompanying video

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(Edited by : Dipika Ghosh)