The only option

Index futures have gained popularity at the cost of stock options

Turnover on the National Stock Exchange's derivatives segment has been going through the roof. Last Tuesday, the segment clocked an all-time high turnover of around Rs 15,600 crore, about 2.5 times the turnover in the cash segment.

But what's interesting is that much of the increase has come from futures. Surprisingly, the average daily turnover in options has been declining over the past 4-5 months.

Besides, the share of stock options in the total derivatives turnover has halved to 7.2 per cent in December compared with 14.4 per cent in August. The share was much higher at around 24 per cent in the early part of 2003.

Interestingly, the share of stock futures has remained stagnant at around 63-65 per cent. It's index futures that has become more popular this year - from a share of less than 10 per cent in then beginning of the year, it now accounts for an over 27 per cent share. What does all this mean?

Derivatives experts point out that Indian players have always been comfortable with futures compared to the complicated options. The reason index futures picked up in the past year is, unlike earlier periods, there was a sharp upward movement in the Nifty. This resulted in a lot of bets being taken on the Nifty itself.

Additionally, there was also some amount of hedging taking place. As far as the decline in options goes, it's clear that players are still not very comfortable with the product and prefer futures. In any case, since the market has been moving only in one direction, the use of options will be limited. There could be a greater interest once a correction sets in.

Cement companies' earnings

The high valuations enjoyed by most cement companies has meant that analysts are sceptical about much further upsides in these stocks. Even though prices have started looking up in the south and east, market players are still sceptical about the immediate future.

The problem of oversupply is likely to remain, thus impacting earnings potential. This, despite the higher volumes clocked by the industry last year.

According to a foreign research house, the industry is expected to record volumes growth of 9 per cent in the second half of the current fiscal, with strong economic growth and high investments in infrastructure and housing slated to drive the momentum.

But volume growth may not necessarily lead to better pricing, say analysts. Nearly 53 per cent of the industry is still controlled by five players. While this is likely to lead to pricing discipline, continued increase on the supply side on the back of de-bottlenecking, brownfield expansion and a better blending ratio is expected to keep the prices weak.

Among the companies, ACC is expected to feel the pressure of low prices. While, ACC recorded an 8 per cent growth in sales volumes in the first half of FY04, the second half is expected to be even better at 14 per cent.

However, keeping in mind that the company has not been able to show any decline in operating costs in the last two years, it stands to reason that more than volume growth it will be price increases that will drive earnings.

As for Grasim, earnings momentum is expected to slow down in FY05 on the back of capacity constraints in VSF and weak cement prices. Analysts, however, expect cost reductions owing to acquisition of L&T cement to provide an upside to earnings, though they are apprehensive about the speed of integration.

The other big player, Gujarat Ambuja Cements, saw a 5 per cent decline in price realisations during the first quarter of FY04 mainly owing to pricing pressures in the west and north. According to analysts, even the recent improvement in prices post-monsoon is unlikely to cause much cheer for the company, as the additional capacity of the Sanghi plant in the west and Grasim's foray into the north will lead to flat price realisation in FY04.

With contributions from Mobis Philipose & Sunil Nayanar