Red Monday

High outstandings in derivatives could be a cause of further trouble

Things went completely out of whack in the equity markets on Monday. All sorts of records were being set "" for the first time ever, trading was temporarily halted twice on the exchanges based on a pre-set trigger.

When trading resumed after the second halt, the Sensex recovered around 250 points from its lows. More importantly, at the end of the day's trading session, it was still down 564 points compared to Friday's close. For perspective, this came close on the heels of the 330 points fall on Friday.

What caused this? According to the broking community, NSE shut terminals of quite a few members on account of a margin short fall. Consequently, in order to make up for the shortfall in margins, the exchange began liquidating the outstanding positions of these broker members.

Meanwhile, brokers who were fortunate to have terminals running were asking clients to either liquidate positions or cough up additional margins to make up for the huge fall in prices.

To add to that, most Asian markets fell heavily on interest rate and oil price fears. With no section of the market in a mood to buy (at least not in large quantities), the selling pressure turned out to be too much to handle.

Importantly, the problem of margin shortfalls and the like are mainly the problem of the derivatives market. Transactions in the cash market, since they are settled on a daily basis, are not much of a problem.

Both BSE and NSE came out with statements that their cash market settlement went through successfully. But positions in the derivatives market are leveraged and are compulsorily settled between a 1-3 months time frame.

Outstanding positions in the derivatives segment stood at Rs 9900 crore as on Friday. With the broad markets having fallen over 20 per cent in just two trading sessions, many players with outstanding positions were forced to hit the panic button, especially in cases where the fall in value of individual holdings was much higher. If the future direction is southward, the huge open interest in the derivatives segment will be a matter of further concern.

Coming back to Monday's trading, it was evident that brokers were preoccupied fire-fighting the fall in the markets and the margin calls.

This is because extremely lucrative arbitrage opportunities were ignored - the difference between the Nifty cash and futures market was as much as 53 points (another record for the highest ever difference), which translates into a backwardation of 136 per cent (annualised). Similarly, most stock futures were also trading at huge discounts.

But the prospect of making an easy, risk-free buck was irrelevant, coming at a time when some brokers were fighting for mere survival.

Raymond's mixed numbers

Raymond's results for the quarter ended March 2004 are a mixed bag: a 14 per cent increase in net sales in the last quarter coupled with a 101 per cent jump in other income (mainly due to write back of excess provisions) led to net profit growing 21 per cent to Rs 39.41 crore.

However, operating profit declined 21 per cent to Rs 21.29 crore largely due to higher input costs and declining price realisations in the fabric and denim segments.

Textile division: Fabric sales have shown a growth of approximately 33 per cent year-on-year in this quarter to reach approximately 7.15 million meters.

However, analysts point out that sales realisations per metre have dropped by approximately 18 per cent in this quarter, as there have been signs of price pressure in key export markets.

Nevertheless, the expanded volume helped the textile division to grow its revenues by 8.5 per cent to Rs 205.63 crore in the March quarter.

In addition, the company has had to contend with wool prices rising approximately 10 - 15 per cent in Q1 FY04 primarily due to a surging Australian dollar.

However, the company's hedging policy coupled with cost control initiatives helped this division's profits to grow 11.7 per cent last quarter.

Files: This division benefited from a general upturn in demand from India Inc for steel applications, such as steel files. As a result, segment revenues rose 19 per cent to Rs 43.57 crore.

Segment profitability rose 9 per cent to Rs 5.56 crore in the March quarter but an increase in input prices such as steel and coke resulted in segment operating profit margin dropping 123 basis points to 12.7 per cent.

Denim: Segment revenues jumped 50 per cent to Rs 53.63 crore.

However, with a global over supply in the industry, analysts point out that the company's price realisations in this division were weak "" realisations dropped approximately 12.9 per cent year-on-year. Larger sales volume helped segment profits rise 60 per cent to Rs 7.29 crore and segment operating profit margins grew 80 basis points to 13.6 per cent.

Going forward, the textile division is expected to perform better with wool prices showing signs of declining.

Also price realisations in the denim segment are expected to improve with the company giving greater emphasis on exports to global fashion houses / recognised brand names.

With contributions from Mobis Philipose and Amritheshwar Mathur