| On Tuesday, the Nifty May contract closed at 1669.1, over 30 points lower than the close of 1699.5 in the cash market. On an annualised basis, this works out to a cost of carry (backwardation, really) of around 40 per cent. |
| It's important to note that the gap between cash and futures prices (known as basis) has widened only this week. Just last Friday, the basis was much lower at 18 points, which translates into a backwardation of 17.66 per cent on an annualised basis. |
| Moreover, the increasing trend in open interest points to the fact that traders are taking fresh short positions. Open interest in the near-month Nifty futures contract increased 20 per cent on Monday and 11 per cent on Tuesday, indicating that fresh short positions are being added at quite a fast pace. |
| On the forefront of the short-sellers brigade, it seems, are the foreign institutional investors (FIIs). Data for Monday's trading session show that FIIs sold index futures worth Rs 500 crore short. |
| What's more, their open interest also increased by over Rs 430 crore, which means that most of the short trades were fresh positions. However, not all of that would be speculative, as some FIIs also use the index futures market to hedge their positions in the cash market. |
| Bharat Forge |
| Bharat Forge's performance in the second half of the fiscal ended March 2004 has been quite a contrast compared with the first half of the year. |
| In the first six months, sales had grown by an impressive 41.2 per cent, with both domestic sales and exports growing at over 40 per cent. What's more, net profit had jumped 87 per cent. |
| In the second half of the year, sales growth almost halved to 22.7 per cent and even net profit growth was much lower at 34.8 per cent. Importantly, growth in exports fell drastically to 9.2 per cent. |
| Lately, the company has been running at near full capacity utilisation, and while domestic requirements have been met, exports seem to have taken a hit. Domestic sales accounted for 61 per cent of sales in the first half period and 60 per cent of sales in FY03. In the second half period, it rose to 65 per cent of sales. |
| For the whole year, sales grew 31 per cent, driven by a 37.3 per cent rise in domestic sales. Margins were maintained, more or less, despite 300 basis points rise in raw material costs (as a percentage of sales). Higher other income and a 20.7 per cent cut in interest costs played a major role in the 54 per cent jump in net profit. |
| In order to tackle the capacity constraints, the Company is setting up a state of the art machining facility for Heavy Duty Crankshafts with a capacity of 2,00,000 pieces/ year. |
| In the forging area, the company is planning to set up 2 additional press lines to cater to the passenger car business with a capacity of 2 million pieces/ year and a third big press line with a capacity of 3,00,000 pieces/ year. the planned expansion will increase its domestic capacity by almost three times. |
| Besides, the acquisition of Carl Dan Peddinghaus (CDP) will also contribute to the company's growth going forward. Based on CDP's provisional results for the March quarter, Bharat Forge's sales would increase by over 76 per cent. |
| However, net profit would increase only around 26 per cent as CDP has much lower margins. While BFL's net margins stood at around 15 per cent in the March quarter, CDP's net margins were just around 5 per cent. |
| But the latter's high asset turnover makes up for the lower margin - in terms of return on capital employed, the two companies are comparable. Besides, the acquisition will give it a footing not only in the European market, but also in the passenger car segment. |
| Based on rough estimates of the consolidated net profit for FY05, Bharat Forge trades at around 15 times earnings. While the prospects are bright, especially with the synergies of the acquisition yet to kick in, the sudden slowdown in exports growth can also not be ignored. |
| With contributions from Mobis Philipose |
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