Short-sellers ride piggyback on NMDC

Before Wednesday's auction, only, 0.66% stake was held by FIIs in the company, leaving very little floating stock in open market

Short-sellers rode piggyback on the NMDC counter in the equity market. Many foreign institutional investors (FIIs) and high net worth individuals (HNIs) had short-sold NMDC shares on the stock exchanges, ahead of the government’s announcement of the auction floor price for Wednesday’s share sale in the company.

Short-sellers made a neat cash pile by pocketing the price difference between Wednesday’s auction price and the market price of NMDC last month, since they started short-selling in the counter in the derivative segment. It was widely anticipated by market players that the NMDC offer for sale (OFS) would be priced at a substantial discount to its market price. This move by the government was preempted by experts after the Oil and Natural Gas Corporation (ONGC) share sale fiasco and Hindustan Copper issue. Both issues had to be rescued by state-run banks and insurance companies, due to aggressive pricing and lack of demand from large institutions.

The NMDC share price was trading at Rs 180-187 during the first week of November but witnessed a decline as the company was anticipated to be next in line for disinvestment. The share price fell over 15 per cent in the past one month, even while the broader equity markets stood firm. Both the BSE Sensex and S&P CNX Nifty of the National Stock Exchange gained around 4.3 per cent since November 1. The BSE PSU index, of which NMDC is a part, too, rose 0.6 per cent during the period.

THE SAFE BET

• The NMDC share price was trading at Rs 180-187 during the first week of November but witnessed a decline as the company was anticipated to be next in line for disinvestment
• The share price fell over 15 per cent in the past one month, even while the broader equity markets stood firm
• Before today's auction, 90 per cent of NMDC stake was held by the government and 6.22 per cent was with LIC 
• Today, open interest in the NMDC call options between Rs 150-Rs 180 was around 30 million
• The share price of NMDC today closed at Rs 154.25 after it fell 3.17 per cent from its previous closing price of Rs 159

“The majority of FIIs who subscribed to the issue today had short sold NMDC shares a few week ahead of the auction. This was the key reason why the share price of NMDC, which has thin floating stock in the market, saw a sharp fall,” said the head of a Mumbai-based broking firm, from where large FIIs are known to take positions.

Before Wednesday’s auction, 90 per cent of NMDC stake was held by the government and 6.22 per cent was with the Life Insurance Corporation. Only, 0.66 per cent stake was held by FIIs in the company, leaving very little floating stock in the open market. However, NMDC is part of the derivative segment and traders can go short, using futures and option instruments. Such short-selling was noticed in ONGC too, which is why the government had to once defer the issue.

After Wednesday’s auction, yet again interest was seen building up again in the counter on the long side. Open interest in the NMDC call options between Rs 150-180 was around 30 million. The share price of NMDC on Wednesday closed at Rs 154.25 after it fell 3.17 per cent from its previous closing price of Rs 159. The indicative auction price of NMDC on Wednesday was Rs 149.23. Brokers and analysts have pointed out that NMDC at its current share price is trading at a steep discount to its global peers and far below its fair valuation.