About a year ago, when inflation was at a two-year high of 6.1%, the government had taken the extreme step of banning futures trading on two pulses, tur and urad. A few months later, it also banned futures trading in wheat and rice, although it must be noted that rice futures didn’t trade on the commodity exchanges and the ban didn’t mean anything.
Now, inflation is near a three-year high and it’s not entirely surprising that the call for banning futures trading in agricultural goods has resurfaced. When tur and urad had been banned last year, the index of pulses in the Wholesale Price Index (WPI) had risen by as much as 27.5% on a year-on-year basis and the index of cereals had risen by 10.3%, much higher than the yearly rate of overall inflation.
This time around, the pulses index in the WPI has fallen by 1% on a year-on-year basis, while cereals have risen by 6.5%. Could the lower rate of increase in pulses and cereals be a result of the ban effected last year? That couldn’t be further from the truth. Wheat prices as reflected in the WPI are still higher by about 5.6%, thanks to the high price the government has been paying for imports. Tur has risen by 14.5% because of lower production. Among all the commodities banned, only the price of urad has fallen by 18% thanks to higher production in last year’s rabi crop.
It turns out that just prior to the ban, prices of urad had been falling and that of tur had been rising, clearly showing that futures prices can be used as good indicators of prices in the future, which will not only help farmers in their decision making but also the government in taking appropriate steps to contain inflation (see chart).
Also, if the rate of price inflation in foodgrains is lower than overall inflation, why the call for the ban? The problem area this time is edible oils, the index of which has risen by 17% year-on-year. But, it must be noted that nearly half of India’s edible oil requirement is imported and rising international prices will naturally lead to an increase in domestic prices as well. In fact, when the government recently cut import duty on edible oils, prices fell sharply. Banning futures trading on these commodities will do little. The experience with last year’s bans is ample proof of that.
A good quarter for Bharat Electronics
This is a market that is slowly realizing that many stocks have been beaten down below fair value. Companies that show good results for the March quarter are being rewarded. One example is Bharat Electronics Ltd (BEL).
Although its provisional sales of Rs4,114 crore for fiscal 2008 is well short of the target of Rs4,725 crore it had indicated in the memorandum of understanding it had signed with the ministry of defence, the results have helped the BEL stock rise from its recent low of Rs1,040 reached on 31 March to Rs1,214, easily outperforming the benchmark indices. That’s because analysts already knew that the company wouldn’t be able to meet its annual target after its dismal results for the December quarter. In the third quarter, revenues fell 23% compared with the year-ago period, while profit after tax was down 24%. Higher staff costs as a consequence of providing for the Pay Commission wage revision and negative revenue growth were the reasons for the poor performance. At the same time, lower material costs helped buoy the earnings.
BEL has now announced a rise of 4.1% in gross sales and a 5.2% rise in profit before tax (PBT) for fiscal 2008. That’s hardly anything to write home about, but the markets are cheering the company’s fourth quarter performance.
Implied sales growth for the March quarter is a respectable rise of 31% in turnover and 39% in PBT, which means both sharply higher execution as well as good margins. That’s quite a recovery from its dismal performance in the third quarter.
The company’s order book now stands at Rs9,450 crore, a rise of 3.5% for the year and worth more than two years’ sales. But new order intake has fallen sharply in 2007-08. Nevertheless, analysts believe that, with the “offset policy”, under which 30% of all defence deals above Rs300 crore will be procured locally, BEL will stand to benefit.
We’ll have to wait for the detailed numbers to find out why BEL did so well in the fourth quarter. But current earnings per share estimates range between Rs104 and Rs117 for 2008-09, which mean a P-E multiple of 10.4-11.7 at the stock’s current price. That’s not bad at all for a defensive stock with assured growth, which is why the stock has been doing well since it announced its provisional results.
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