Futures Trading in Agri Produce Rises 3-fold

Futures trading in most of the active agricultural commodities has jumped more than threefold in the first fortnight of May this year from the same period last year.

Soyabean, chana, rape/mustard seed, jeera and soy oil recorded a more-than-300 % rise in trading value. During the period,exchanges clocked a 67% rise,according to data from Forward Markets Commission (FMC).

The rise in volumes of agricultural commodities has helped traders to look beyond bullion. Genuine traders have understood the fundamentals of agri commodities and they are betting their money at the right opportunity, said MK Anand Kumar, chief (corporate services), NCDEX.

The exchange recorded a 63% jump in its turnover to Rs 84,051.73 crore during the first fortnight of May. Similarly, Ahmedabad-based National Multi Commodity Exchange, which mostly trades rubber contracts, registered a growth in turnover to Rs 8,498.07 crore from Rs 6,228.62 crore in the same period. Indian Commodity Exchanges (ICEX) turnover rose to Rs 9,158 crore from Rs 8,311 crore and Ace Derivatives Exchanges turnover jumped to Rs 6,073 crore from Rs 3,944 crore. The hedging practices on commodity exchanges are strongly regulated by FMC and they are proving effective for market participants, said Rajnikant Patel, CEO, ICEX. However, the trading volume in bullions has dipped during the period. Volatile prices of gold and silver, mainly driven by international markets, have driven the traders away. International prices have been too volatile.

The import duty has taken the sheen off the metal for the time being, said CP Krishnan, wholetime director, Geojit Comtrade. The overall turnover of commodity exchanges dipped by 7.32% to Rs 18.49 lakh crore till May 15 of this  fiscal, mainly due to bearish trade in gold and silver futures, FMC data said.

After the unusual steep spike in guar gum prices during March 2012,the regulator asked the five national commodity bourses to furnish mark-to-market gains in all commodities during the October 2011-March 2012 period for a comprehensive reviewing. The comprehensive reviewing is helping us in finding out many important aspects of futures trading, said a top FMC official.We are making it (futures trading) much more efficient and transparent, he added.

Buy Stocks of Companies with Strong Earning Visibility

Prashant Mahesh says firms with strong earning visibility,like consumption companies,and those that use regulatory changes to their advantage,can steady the ship during the current turbulent times

Earning visibility is a term that is in vogue on Dalal Street these days.Sure,market pundits often come up with new or often dusted-off old strategies to counter a depressed market that is testing everyones patience.This time around faced with a deluge of negative news,overseas as well as local they are asking investors to play safe and opt for stocks with good earning visibility than chasing highgrowth stocks.The crux of the argument is simple: be happy with modest returns with low risk,instead of chasing stocks with high growth potential,but carrying huge risk.On the global front,fears of a default by Greece and the country moving out of the Euro continue to worry investors in the near term.On the domestic front,the sharp depreciation of the rupee and high inflation worry investors.Indias CPI inflation rose to 10.4% year-on-year in April 2012 from 9.4% in March 2012,while the rupee has depreciated from 44.08 to a dollar and now stands at 54.43 a sharp decline of 23%.Reflecting the sentiment,the BSE Sensex has dropped 11% from 18,086 in May 2011.Investing in companies where there is earning visibility could provide you some margin of safety.You could spot such companies in areas where consumption continues to be strong, says Dipen Shah,head of fundamental research at Kotak Securities.Companies that use a regulatory change to their advantage could have a good earning visibility, says Pankaj Pandey,head of research at ICICI Securities.

STRONG CONSUMPTION PROVIDES VISIBILITY 

Proponents of the consumption theme bet on the rising disposable incomes in rural markets and argue that it will lead to higher consumption,and keep the consumption theme strong.This group believes companies that would benefit from this trend could be the safe-picks in the current environment.Take the case of Bajaj Electricals which has about 70% of its sales coming from fans,household appliances,lighting and luminaries.Several products of Bajaj Electricals find usage in the household durables segment,where ownership is low in rural areas.With higher disposable income and increase in nuclear families,consumption is expected to be strong,leading to higher revenues, says Abhishek Jain,head of research at JHP Securities.He expects sales of the company to grow by 20% and net profit by 30% in the coming year.The consumption story is equally strong in the case of Godrej Consumers,too,where both the domestic as well as international businesses continue to show strong growth.The acquisitions made by the company have started yielding results.During the last quarter of 2011-12,the domestic business grew by 23% while the overseas business grew 49%.Effective commodity sourcing and integration led to an improvement in margins with operating margins growing by 102 basis points during the quarter, says Anand Kuchelan,VP (research),Padmakshi Financial.He expects profit to grow by 34% to.985 crore in the coming year.The company is doing exceedingly well both on the domestic as well as international fronts.Margins for the consolidated operations have gone up,which give growth visibility, says Dipen Shah.

MAKING THE BEST OF REGULATORY CHANGES 

The advocates of this theory believes that one easy way to pick winners is to spot companies that move fast and make the best use of the changes in the regulatory environment.They cite the example of Yes Bank.After the central bank freed up interest rate on savings bank accounts,Yes Bank quickly raised its rate to offer between 6% and 7% to savings bank account holders.The strategy paid off handsomely.The CASA (current account savings account) as a percentage of total deposits for the bank has moved up from a mere 7% to 16%.The company also has a target of increasing the share of retail term deposits to 36% by 2015 compared to 18% in 2012.All this means lower cost of funds for the bank,which would mean an increase in net margins over the long term, says Avinash Gorakshkar,director,moneyinvestments.in.We see a huge jump in Yes Banks balance sheet size over the next 2-3 years.By 2014,we see advances moving up from.38,000 crore to.55,000 crore,and net profit moving from.977 crore to.1,650 crore,translating into an EPS of.46, says Pankaj Pandey.Trading at.330,this discounts the 2014 EPS by a mere 7 times,making it an attractive investment opportunity.Despite the uncertain environment,Yes bank has not seen any deterioration in its quality of books.Valuations at 7 times its projected 2014 earnings are low,given the fact that the company is planning to increase its branches to 750 and raise its CASA mix to 20%, adds Avinash Gorakshkar.Similarly Dish TV could be a good investment opportunity on account of the benefit it could get on account of mandatory digitisation.The deadline to go digital in the metros is June 30,2012.The Cable TV Act proposes complete digitisation of the cable network throughout India by December 2014.For the first time,in the fourth quarter of the current year,the company has turned free cash flow positive.Due to compulsory digitisation,the company could see good volume growth in the next couple of years, says Vinod Ohri,director,Silverdale Capital Services.

Going,Going,Guar

Despite a trading ban on exchanges,guars fascinating story may be far from over 

SUGATA GHOSH 

The first call was from a nondescript border town in Pakistan.A day later,there were a few more calls from Karachi and Islamabad.The persons,mostly traders and exporters,were calling up an official of an Indian commodity exchange.They had similar queries.Janab,yeh aapke guar ki keemat nahi mil rahikya baat hain Pehlewale rates kahan se milenge For a while the Indian exchange had been changing their fortunes in a strange way.While the law bars these traders from taking positions on the exchange,live quotes flashed on the website of the bourse came handy in fixing the best price.They were understandably disappointed when the official said that trading had been suspended.

Trading came to a halt around end March when the exchange found it was becoming too hot to handle guar tiny beans used world over in the making of cosmetics,as emulsifier in icecreams,sold in India as a vegetable and cattle feed (go-aahar as the name suggests) and,since last few years,oil companies using the seeds as lubricant in shale gas fracking.Its a fascinating story how the eminently forgettable guar seeds made news when prices zoomed,first fanned by genuine demand and low supply,followed by whispers of price rigging that grew louder by the day.

Futures,shadowing spot prices,surged almost ten times from.3,000 a quintal in March 11 to over.25,000 a year later when trading stopped.A clutch of operators,who had ears to the ground and had perfected the sharp practices in a volatile and shallow commodity futures market,made a killing.Hand in glove with brokers,they went long on futures,took deliveries of the seeds,and built more long positions,betting on higher price.Spot prices rose as they simultaneously cornered the stock,turning their futures more profitable.

As prices rose,there was another set of investors rich,naive,unfamiliar with the market and depending on inexperienced,20-something analysts in brokerages who have positioned themselves as commodity specialists in a declining stock market.This group,drawn into the wonder world of commodity futures,went short on guar betting that prices would soon crash having risen to unheard of levels.The longer they held on to their shorts,the more they lost,and the greater was the hue and cry.One of the short sellers royally fooled by the crafty bulls happens to be a senior office bearer of an industry lobby.(Guar prices,interestingly,have not crashed post suspension of futures trading).

Todays commodity futures market is like the Calcutta Stock Exchange of the 80s where a handful of seths had the last word on counters like ITC and Hind Motors.If you have a market like that,you are asking for trouble.Take the case of guar: few outside the trade circle track how the seed price moves and only a handful could sense in advance that the harvest would be lower this year with India producing 80% of guar,it was a crucial piece of information that mattered.Here lies the subtle uncertainty that makes commodity futures different from stocks: the number of shares in a scrip are fixed unless there is a public issue,bonus,buy back,etc;but the output of guar or any commodity can change and move the futures price dramatically if theres untimely rain (as it happened last season),or if farmers run into financial troubles which fortunately wasnt the case.Indeed,many made good money and one hears stories of farmers in Rajasthan keeping the precious seeds under lock and key.

Till some years ago,guar growers quietly accepted the price that was doled out to them by half a dozen firms who exported the beans.That changed after December 15,2003,when trading began on guar futures.Soon,farmers and traders in Bikaner mandi,who got a whiff of the live trading activity,were calling up the exchange like the traders in Pakistan to make sure they were not short-changed by the buyers club who had been dictating the price for decades.

The guar story may be far from over.Foreign oil companies want to carry out contract farming and strike forward deals with farmers,cropping patterns may shift with more farmers tempted to cultivate guar,and futures prices with trading expected to resume in a month or two will swing between changing forces of local supply,global demand and imponderables like the weather.If indeed farmers grow less of other crops like kapas to bring more land under guar,this years rally,even if its far less stunning,could well be in kapas.Those who know their onions will make money,irrespective of whether they are on the right or wrong side of regulations.Some fat cats,as usual ignorant of guar (or kapas or some other commodity),will once again be left skating on thin ice.