What's the secret behind Jhunjhunwala's Pipavav foray?

Last week, the New York Post carried an article beginning with the provocative line: Is Warren Buffett the Oracle or the consummate insider? The report has analysts on record asking whether Buffet knew of two key impending decisions-mass layoffs and executive firings-while investing $5 billion in the troubled Bank of America. Back home in India, some market players are asking a similar question of ace-stock market investor Rakesh Jhunjhunwala about his recent investment in Pipavav Defence and Offshore, formerly Pipavav Shipyard.

Did he know about the company’s joint venture with state-owned Mazgaon Dock for making submarines and warships, announced a week after Pipavav’s board had approved a preferential issue of warrants to him and his associates?

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Or rather, did the management brief him about the progress of their bid, (while trying to convince him to invest in their company.)

Details of the warrant issue can be read here.

Jhunjhunwala enjoys a tremendous fan following among the stock market community because of his hugely successful bets on companies like Titan, Crisil and Lupin to name a few. But his latest deal has raised eyebrows among a section of the market that includes some veteran traders who hold him in high esteem.

[caption id="" align=“alignleft” width=“380” caption=“Rakesh Jhunjhunwala’s latest deal has raised eyebrows among a section of the market that includes some veteran traders who hold him in high esteem.”][/caption]

The structure of the deal makes it look as though the company was more keen to have Jhunjhunwala on board rather than the other way round. In other words, the company may have wanted a reputed investor to endorse its stock, which has been having a poor run for some time now.

The company’s initial public offering, priced at Rs 58 a share, was listed in October 2009. After touching a peak of Rs 117 in August the following year, the stock has been gradually slipping, and fell to Rs 61.50 last month. The shares then rallied 25 percent in the two weeks leading to the September 6 announcement of the warrants issue.

Under the deal, Jhunjhunwala pays around Rs 20 crore upfront for the 1.05 crore warrants (25 percent of the Rs 82 crore that he is supposed to invest), and he can convert them into shares at Rs 78 anytime over the next 18 months. If he chooses not to exercise the warrants for some reason, he stands to forfeit the upfront payment. Curiously, despite the total investment not being huge relative to the size of his overall portfolio, Jhunjhunwala has not directly bought any shares in the company. What this could possibly mean is that Jhunjhunwala is cautious about the bet, and that he is more concerned about limiting potential losses for the moment. This is quite different from a similar investment in Delta Corp last year, when he bought a substantial chunk through equity and a smaller portion by way of warrants.

Pipavav shares surged 13 percent to Rs 91 last Monday when the joint venture with Mazgaon Dock was announced.

There is nothing to suggest that Pipavav may have shared information with Jhunjhunwala that was not there in the public domain. At the same time, it would be nave for anyone to assume that in general, all shareholders are treated on par. For all the checks and balances that regulators keep introducing from time to time, it is a fact that the bigger investors are usually at an advantage compared to smaller ones, across the world. Companies like to have high-profile investors owning their stock, as it serves as a vote of confidence to improve their standing among the investing community.

And while companies may not share all their confidential information with their celebrity shareholders all the time, there is the occasional nudge and subtle hint, so that the big boys are not caught totally unawares.

Small investors may gripe they don’t have access to the kind of information that big-ticket investors do, but there is nothing they can do about it. Well, there is something they can do, and that is not to blindly follow high-profile investors while making equity investments. Investors holding ordinary shares of Goldman Sachs and GE bought in 2008 on the heels of Warren Buffet’s decision to invest in those companies (through preferred stock) are sitting on a loss at the moment. Even Warren Buffet made a tidy profit on his Goldman Sachs investment, but not on his bet on GE. Similarly, investors who followed Jhunjhunwala in Titan, Crisil, Lupin and a handful of other stocks may have earned good returns. But there are plenty of stocks-quite a few from the infrastructure space - where even Jhunjhunwala had to book losses or earned sub-par returns over the last few years.

Even a couple of multi-bagger stocks in the portfolio of large investors are more than enough to offset losses from a dozen bad bets, and this is where they score. But that is not the case with the ordinary investor whose investments are skewed towards a few stocks, in the hope of making outsized profits.

The author is Editor, moneycontrol.com