Mumbai: IndusInd Bank’s beaten-down shares may be prime for a rebound, for now, as the central bank’s weekend assurance revives investor confidence, sparking a scramble for its shares.
The bears who stormed the bank’s derivatives counter last week may find themselves trapped even as wealthy investors move in, analysts said. As share price rises on fresh buying, bears may rush to cover their short bets, triggering a rally as the market opens on Monday.
On Saturday, the Reserve Bank of India (RBI) said IndusInd Bank’s financial health remains “stable” and that it was “closely monitoring” the same. Analysts said after the RBI statement they expect the bank’s cash counter to see more bargain hunting by wealthy clients and family offices and the derivatives counter to witness added short-covering by punters.
“Family offices, HNIs and other institutional players are allocating a portion of their funds to IndusInd Bank as part of their risk strategy, given the magnitude of the price fall,” said Ambareesh Baliga, an independent market analyst.
Also read | IndusInd Bank flags lapses worth ₹1,530 crore in derivatives portfolio
IndusInd Bank shares have plunged 57% from a 52-week high of ₹1576.35 on 8 April, 2024 to ₹672.35 on Thursday. Markets were closed for Holi on Friday.
Bargain hunting
Baliga said that for some investors, it made “sense to allocate a part of their risk ” to IndusInd after the huge fall. The RBI statement of the bank being “well-capitalized” could result in further bargain hunting in the cash market and short-covering in derivatives, which could support a further recovery in prices from Tuesday’s low of ₹606.
Bears flocked to IndusInd after its derivatives accounting lapse surfaced last week. Though some of the massive cumulative bearish active futures positions of 57.75 million shares created on Tuesday were covered by Thursday, the cumulative outstanding futures positions remain high at 48.18 million shares as of that day, NSE data showed.
Exchanges have barred fresh positions in IndusInd derivatives since last Wednesday after the stock’s cumulative open positions crossed the marketwide position limit (MWPL) set by stock exchanges. As of Thursday, open positions of all futures and options contracts on IndusInd stood at 143.87 million shares against the MWPL of 120.8 million shares . Unless the stock falls well below MWPL, it will remain in ban for fresh trades.
Also read | Can IndusInd Bank overcome governance woes and market uncertainty?
Recovery
The RBI statement came after the stock’s NSE cash counter saw huge delivery volumes across two days. While Tuesday’s selloff witnessed deliveries hitting a one-year high of 31.9 million shares, Wednesday’s delivery of 14.28 million shares a day later was the highest in almost five months.
The combined effect of cash buying at lower levels and derivatives short-covering has helped the stock recover 11% from a 52-week low of ₹606 on Tuesday through Thursday’s closing of ₹672.35. The recovery could continue for now.
“The recovery might continue with likely short-covering and bargain hunting, provided that no fresh negative surprise hits the counter,” explained Shrikant Chouhan, head of research (private client group) at Kotak Securities.
Chouhan said the “silver lining” in the issue was the bank disclosing the derivatives’ accounting issue before the March quarter results. He added that the Street could, subject to no further negative surprises, begin pricing in the one-time hit to IndusInd Bank’s net worth.
Also read | Mint Explainer: How IndusInd Bank slipped up on foreign currency hedging
After the recent drawdown, IndusInd Bank is available cheaper than other lenders like Yes Bank and IDBI Bank, added Chouhan. For instance, IndusInd Bank currently trades at a price to book ratio of 0.8, against Yes Bank’s 1.09 and IDBI Bank’s 1.45, per BSE data. Book value of a company refers to the what shareholders would get if the company were liquidated today .
Margin funding rises
As the IndusInd stock plunged, investors also scooped up IndusInd shares through margin trading, which enables an investor to leverage the purchase by up to four times. The total amount financed under margin trading facility by all brokers rose to ₹409 crore on Wednesday from ₹343 crore on Monday, per NSE.
Also read | IndusInd Bank promoter Ashok Hinduja backs MD, says balance sheet remains strong
Buying under margin trading, where an investor pays only a minimum margin to buy a stock with the rest being financed by her broker against interest, signals that investors are leveraging themselves as they sense “an opportunity of making quick returns in the short term,” said Sudhir Joshi, consultant, Khambatta Securities.
