HUL futures-spot discount widens to Rs 23 on hectic investor activity

MUMBAI: Hectic investor activity on the HUL futures counter ahead of the completion of an open offer by its Anglo Dutch parent Unilever has widened the discount of the near-month contract to the underlying share sharply.

The discount at which the July futures is trading at to HUL's cash market share has widened from Rs 15 since the open offer period began last Friday to almost Rs 23 on Wednesday. The widening of the spread has baffled a few punters who expected the discount (futures to spot) to be Rs 7-8 considering Unilever is offering a dividend of Rs 6 per share to those who tender shares during the open offer, which closes on July 4.

However, the sharper-than-expected discount is on account of hedging by investors of that portion of shares they expect would be returned to them in case a greater number of shares are tendered at the offer. They expect the share price to correct post the open offer, given the sharp rise in price since the offer announcement by Unilever on April 30. On that day HUL price rose by 18% to 584 and has remained more or less steady since then. If the share price corrects, the investors would take a hit on the residual portion of shares they hold. To offset a probable loss, they are selling HUL futures big time.

Also, punters, who expect the shares to fall after the open offer, are selling the July futures, which is also widening the discount. "An investor will tender all her shares during the open offer but she expects some may be returned and that's what's being hedged," said Yogesh Radke, head, quantitative research, Edelweiss. "That's widening the discount the futures contract is trading at to the underlier."

A bunch of foreign and domestic brokerages, including CLSA, Kotak, IDFC, ICICI and Anand Rathi, has recommended that minority shareholders subscribe to the open offer, whose price at 600 a share offers an attractive exit even during the best of times. The share price of HUL may correct after the offer as the company could face challenges in the coming quarters, the brokerages added.

It is these recommendations that are raising anticipation among investors that the open offer could meet with good response and that some of the shares tendered by them could be returned. The recommendations are also compelling punters who don't hold the stock to sell the futures in anticipation of windfall gains. "Traders who expect a correction in the share price post the offer are shorting July futures, which has raised the discount to the cash share," said VK Sharma, head, private broking and wealth management, HDFC Securities.

Unilever's current stake in HUL is 52.5% and if the open offer is fully subscribed, the Dutch parent's stake will rise to 75%, the maximum a promoter can hold in a listed private company here.

"Over the past two quarters, HUL's volume growth has decelerated to around 5-6% and the average realisation growth has come off to 6.5% in Q4FY13," said ICICI Securities. "We expect HUL to continue with 4-7% volume growth trajectory in the coming two quarters, with average realisation growth of around 4-5% over the period," it said.