MUMBAI: Stocks that are part of the recently-concluded further fund issue of Bharat 22 ETF are likely to see a rally as traders who sold their futures contracts before the offering will now reverse their positions. Many traders including arbitrageurs had put money in the Bharat 22 ETF issue which ended on Friday and simultaneously sold futures of stocks that are part of the ETF (exchange traded fund, which is a basket of stocks).
“If somebody is applying in the ETF, they hedge the likely receivable of units by shorting the stocks which are part of ETF. They short futures of high weightage stocks which gives them sufficient hedge. Once the allotment is done, these short positions will have to be covered,” said Amit Gupta, head of derivatives at ICICIdirect.
The second tranche of the Bharat 22 ETF was subscribed 2.3 times on the final day of the offering, with the issue getting subscription to the tune of ₹14,000 crore, according to reports. The government had targeted mopping up ₹6,000 crore from the Bharat 22 ETF with a greenshoe option of another ₹2,400 crore.
The ETF comprises 22 stocks including that of public sector bluechips and private companies which are strategic holding of Specified Undertaking of Unit Trust of India or SUUTI. These include NALCO, ONGC, Indian Oil Corp, BPCL, Coal India, SBI, PFC, REC, Axis Bank, Bank of Baroda, L&T, ITC, Power Grid and NTPC, among others.
“The SUUTI stocks and energy stocks which are part of the Bharat 22 ETF have a high weightage in it. So these stocks are likely to see a short covering led rally,” said Gupta.
The short covering will depend on how oversubscribed the ETF is and likewise how much have people hedged against it, added Gupta.
The government has offered the Bharat 22 ETF at a 2.5 per cent discount to its net asset value or NAV. Last year in November when the government launched this ETF, it had given a 3 per cent discount.
“Arbitrageurs have hedged by selling futures just like they did in case of the Bharat 22 ETF last year. The stocks like L&T, ITC and ONGC which are part of the Bharat 22 ETF are likely to be firm in the coming days given that the hedging activity is over,” Yogesh Radke, Head of Alternative and Quantitative Research at Edelweiss Securities When allotment happens, some short covering is possible, he added.
Analysts are also positive on some of the stocks in Bharat ETF due to better risk-reward.
“We are positive on ITC, SBI and L&T. These stocks have seen correction in recent days and risk reward is attractive now,” said Chandan Taparia, derivative analyst at Motilal Oswal.
Shares of ITC have fallen nearly 5 per cent in the last one month while that L&T have declined 2 per cent during the same period.