Lupin’s option costs jump to 6-week high as stock extends drop

Mumbai: The cost of protection against swings in Lupin Ltd. shares jumped to a six-week high as India’s second- biggest drugmaker by market value slumped to a four-month low.

At-the-money one-month option costs in the company climbed to 31.5 points at close in Mumbai, the highest level since 26 October. The generic drugmaker, controlled by billionaire Desh Bandhu Gupta, fell 1.5% to Rs1,733.8, a third day of declines.

Shares of the Mumbai-based company have slumped 15% this quarter, as a gauge of health-care companies turned into the worst performer on the MSCI India Index after giving the best returns in the first nine months of the year. Lupin shares are valued at 25.8 times their estimated 12-month earnings, near their lowest level in 10 months, compared with a multiple of 23.1 for the MSCI EM Pharmaceuticals Index.

“Some funds are selling shares of drugmakers on concerns of high valuations,” Chakri Lokapriya, the Mumbai-based chief investment officer at TCG Advisory Services Pvt., which manages about $3 billion in assets worldwide, said by phone. The fear of a Fed rate increase may “lead to fresh shorts in defensive stocks like drugmakers.”

The declines came as foreign investors pulled $778 million from Indian stocks during the period as the Federal Reserve prepared to raise its benchmark interest rates from near zero.

The cost of a Lupin put option with a strike price of Rs1,700, the most popular option by open interest, climbed 17%. The total number of put options increased to 1,762 contracts, compared with a 20-day average of 1,304, while open interest in calls fell to 1,490 from a 20-day average of 2,138, according to data compiled by Bloomberg.

While traders were boosting their hedges in Lupin amid a broader selloff in drug shares, the stock could find support near Rs1,690, Dhiraj Bhutoria, a director at Varun Tradecom Pvt., a Kolkata-based securities brokerage, said by phone.

The Nifty 50 Index climbed 0.9% on Thursday, while the India VIX index, a gauge of demand for option hedges, lost 2.6% to 16.29. Bloomberg