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HUL At 700: Best To Not Have Tendered!

When I wrote about the HUL Open Offer, I suggested that it would be better to have sold the stock in the market than to have tendered in the open offer. However, the best option seems to have been to wait for a month anyhow.

The stock went up nearly 10% yesterday. News is that the stock has been reweighted in the MSCI indexes and that the company has increased prices 15%.

I don’t really understand how this works, but the FTSE release goes like this:

Hindustan Unilever (India, 6261674) will remain in the index with an unchanged shares in issue total of 2,159,471,968 and an increased investability weighting of 33%.

Given that the free float has decreased, how can investability weight be increased? It’s based on the free float, and the free float has reduced! I don’t get how this works, honestly – it does seem ad-hoc, though I don’t have enough information.

But this is not a large impact. The investability weight has very little bearing on the stock. As a member of the index, it is only 1% even after this change. Additionally, other stocks like Bajaj Auto have seen a reduction in investability weight from 75% to 24% last year, without a significant impact.

The stock has broken all barriers. Today, it trades above Rs. 700.

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Click for larger picture.

Nearly everything about this stock, from a technical angle suggests that it is in a strong uptrend. The MACD cross was only a couple days back and I would be wary of any short exposure on this counter. Of course, valuations are insane, for a stock that has shown growth of just 10% or so, but in the short term, sentiment will prevail.

(No positions)

  • Jose says:

    Deepak, I see 3 reasons for yesterdays move,
    1. Market makers realised the float is less in the market and played an Intra Day game as most of the stocks are struck with the promoters in the Open offer. So a simple Demand / Supply played out & Intraday players made money. If you notice the delivery & Open interest did not see any major moves.
    2. There was Huge Shorts in the Markets, as people who tendered expected a fall to 550 levels post offer, so Short covering helped too.
    3. This was also a NIFTY management exercise, to maintain the VWAP levels on NIFTY. They used HUL & ITC well.
    No other Logic / News flow augers right for HUL for the 10 – 12 % move..@ 42 time PE..is crazily overpriced.

  • san says:

    If you see the long term chart of HUL,it was in a secular uptrend for the past 4 years and yesterdays Wide Range Bar indicates the uptrend is over in the counter.As I have noticed in many counters,a wide range bar after a continous uptrend marks the end of the impending trend.

  • Jose says:

    No Deepak, today was the best day to Short it as all the Short covering is over and the money should be in the Bank accounts of people who have tendered & balance in the DMAT A/c. So supply will start from next week. The fair value of HUL is Rs 550.

    • sachin says:

      Where is the question of balance shares coming back? The acceptance ratio was 100%. Most people did not tender their shares. The shares are still with the shareholders. A large proportion of HUL shareholders are long term holders and they are not interested in selling their shares. That is why the supply is limited even at Rs 700 a share.

  • Jose says:

    Yes Sachin, you are right, HUL managed just 67 % Vs 75 %. So HUL will be played by Market operators. So a PE @ 42 may make sense in a Demand / Supply mismatch. same happened with Glaxo too.