Investors smell a profit, sell NTPC futures, apply in FPO

Hedging Sees Open Interest In Power Co's February Futures Shoot Up 10%

OPEN interest in NTPC February futures shot up 10% on Wednesday to 2.57 crore shares, as high net worth individuals (HNIs) and retail investors attempt to pocket risk-free gains by going short on the futures and hedging that position by applying for an equivalent amount of shares in the ongoing follow-on public offering (FPO) of the utility company. 

    The February futures closed at Rs 206.70 on Wednesday, a discount of Rs 2.55 to the stock price of Rs 209.45. There was some pressure on the stock as well at higher levels, as many retail investors and HNIs sold a part of their existing holdings, in the hope of buying back that portion through the FPO route.
    In the cash-futures arbitrage, a trader short sells the futures which are trading at a premium to the spot (shares), and buys an equivalent quantity of the underlying shares. In this case, NTPC shares are quoting at a premium to the futures. But the trader is counting on the shares that will be allotted to him at Rs 201 apiece, in the FPO, a substantial discount to the futures price. 
    In such a form of arbitrage, the difference between the futures and the stock price is the spread that the investor makes. In the case of NTPC, if the trader sells the futures at Rs 207 and is allotted the stock at Rs 201, he has locked in a profit of Rs 6 per share. On getting the allotment, the traders will reverse both positions. He will square off short positions in the futures segment, and sell the shares that he has been allotted. If the retail portion of the book is subscribed more than one time, HNIs and retail investors will not be able to hedge their short positions entirely, as they will be allotted lesser number of shares than they had bid for. 
    Dealers tracking the counter say that the arbitrage play could be nearing its fag end, as many traders have been going short on NTPC futures during the past few sessions. 
    "At Wednesday's prices, there is a good riskfree spread still available; but it may not last for long," said an old-time broker, who did not want to be named. Brokers have cautioned their HNI and retail clients against taking up naked short positions in the stock at these levels. 
    "Unless the overall market conditions worsen dramatically, the stock is likely to find support at Rs 201. In fact, players who had initiated directional short positions last week (unhedged short positions, betting on a decline in the stock price) should start covering up their positions, considering choppy market conditions and the fact that they are already sitting on a tidy profit," said the broker. 
    NTPC's 41.22 crore FPO opened for subscription on Wednesday, and 70% of the book has already been filled up. Bidding for the institutional portion of the book is through the French auction method, in which shares will be allotted to successful bidders starting from the highest bid downwards. Retail and HNIs will get the shares at Rs 201, which has been set as the floor price for the auction. 
    ICICI Bank has put in a bid for three crore shares at Rs 210, the highest bid so far, investment banking sources told ET NOW. India's state-owned insurance giant LIC is learnt to have bid for 20.4 crore shares, the entire institutional portion, at Rs 209 per share. Analysts expect the NTPC stock to start firming up closer to the day of allotment, as traders rush in to cover their short positions.