In this edition, we talk about the rise of F&O trading in India and why it has the finance minister worried. We also talk about how SEBI is tightening norms for SME listings and the multi-billion-dollar investment plan unveiled by Mahindra & Mahindra as well as the onset of monsoons and what that means for the agricultural economy.
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Higher the risk, higher the reward – Many people cite this famous proverb to justify decisions related to life in general, their careers, investments, and stock market trading, particularly in futures and options, or F&O. What is often left unsaid is the low probability of getting a high reward—or not getting any reward at all—when it comes to F&O trading.
For those unfamiliar with F&Os, these are essentially complex financial products that one can use to bet on stocks, commodities, or other securities. Theoretically, F&O trading can help traders generate outsized profits. In reality, however, only a tiny fraction of people actually manage to do so.
But why are we talking about F&O trading today? You see, F&O trading in India has boomed over the past few years, especially after the onset of the Covid-19 pandemic, when people working from home had plenty of time on their hands. This has raised concerns in several quarters. This week, finance minister Nirmala Sitharaman highlighted those concerns.
“Any unchecked explosion in retail trading of futures and options can create future challenges, not just for the markets, but for investor sentiment and household finances,” Sitharaman said at an event organised by the BSE. Sitharaman also said that regulators should proactively consult with the market to tweak regulations.
The remarks are significant since this is the first time the finance minister has publicly spoken on the issue. Even more significant is the fact that she talked about not just investor sentiment but also of household finances.
So, what prompted these comments?
Several reports over the past year or so have underlined the growing trend of F&O trading in India, particularly by retail traders. The total number of unique individual traders in the equity F&O segment was 45.2 lakh during FY22, up from 7.1 lakh during FY19, the Securities and Exchange Board of India said in a January 2023 report.
Similarly, Axis Mutual Fund said in an October 2023 report that the ratio of the notional value of derivatives traded in India to cash trading is 422 times, the world’s highest. In most markets, this ratio is 5-15 times, it added.
The SEBI report also noted that 89% of the individual traders in the equity F&O segment incurred losses and that the average loss was Rs 1.1 lakh during FY22. For the group of active traders (excluding outliers), the average loss of a loss-maker was over 15 times the average profit by a profit-maker during FY22, it said.
So, some people do make a profit, right? Yes, that’s correct. In FY22, 11% of individual traders made an average profit of Rs 1.5 lakh. But, if this is your key takeaway, here’s another nugget from the SEBI report.
If we exclude the outliers—those who make superhigh profits—from the group of active traders, only 6% people made a profit. How much was that profit? A princely average sum of Rs 3,400 in FY22!
So, is it really worth trading in F&Os? That’s what we are asking you.
SMEs under the scanner
F&O trading isn’t the only thing raising concern among regulators. SEBI and stock exchanges are planning to tighten regulations for initial public offerings of small and medium enterprises on the SME platforms of BSE and NSE.
The development comes in the wake of a surge in SME listings over the past couple of years. According to PRIME Database, which provides data related to capital markets, as many as 205 SMEs raised a total of Rs 6,000 crore from IPOs during 2023-24. That compares with 125 SMEs raising Rs 2,200 crore in 2022-23.
Some of these SME IPOs were subscribed 500-1,000 times. This has raised concerns around misuse of the SME listing platforms that SEBI introduced in 2012 to allow small businesses to tap into the capital markets.
Indeed, SEBI chairperson Madhabi Puri Buch said in March that the regulator noticed “signs of manipulation” at both the trading and issuance levels in the SME space. She also said that SEBI was working to introduce more disclosures to safeguard investors. These disclosures could pertain to objects of the issue, financials of the issuer, and risk factors.
Apart from more disclosures, SEBI is looking to increase the minimum size of such IPOs to Rs 30-50 crore to ensure only serious companies float share sales, Reuters reported this week. Currently, there is no minimum size for SME IPOs.
SEBI also said recently that it barred three SMEs from capital markets on charges of misusing funds raised via public offerings. It also said in one of its orders that retail investors should exercise due diligence while investing in SMEs and not be swayed by “seemingly attractive returns that may quickly come their way.”
So, if you invest in SME IPOs or are planning to do so, do choose your options carefully.
Revving it up
Moving on to corporate news, auto major Mahindra & Mahindra (M&M) is set to invest Rs 26,000 crore in the auto sector over the next three years to develop new vehicles and expand capacity. Of this, Rs 12,000 crore will be invested in the electric vehicle unit Mahindra Electric Automobile Ltd. The SUV business will get Rs 8,500 crore investments while commercial vehicles will get Rs 4,000 crore. The company will also invest Rs 5,000 crore in its farm equipment business.
This announcement is significant because players like M&M are finally waking up to competition from international EV giants like Tesla and BYD, who are already looking at the Indian market and are being welcomed by the government to set up manufacturing capacity in the country. M&M also says it will explore launching hybrid vehicles, too.
Mahindra says it plans to have up to 30% of its SUV portfolio electric by 2027. However, the maker of XUV700, Thar and Scorpio SUVs won’t shift its focus away from vehicles with internal combustion engines powered by petrol and diesel. “The focus is on ICE and electric vehicles. ICE is important for us and we will continue to invest in it. In electric vehicles, we feel we can be in a dominant position,” said Anish Shah, the company’s managing director.
M&M has had a good run over the last year with auto sales zooming. The company crossed 100,000 in unit sales for the first time ever in FY24. In the SUV segment, its revenue market share has moved up 130 basis points to 20.4%, thanks to an 18% growth in volumes. Now, it is laying the groundwork to take the fight to Tata Motors, Maruti and Hyundai.
Munch on this
Nearly nine decades back when a small-time businessman in Bikaner started Haldiram’s, little would he have imagined that his tiny business would one day be at the centre of a multi-billion-dollar bidding war among some of the biggest global private equity firms. Yet, that is what has exactly come to pass.
A consortium led by American private equity firm Blackstone, along with Abu Dhabi Investment Authority and GIC of Singapore, has submitted a non-binding bid to acquire a controlling stake in Haldiram Snacks Food Pvt Ltd, the combined packaged snacks and foods business of the Delhi and Nagpur factions of the Agarwal family. Blackstone and its partners are keen to buy 74-76% of the company, valuing it at $8.0-8.5 billion (Rs 66,400-70,500 crore), The Economic Times has reported.
Separately, Moneycontrol reported that US-based Bain Capital and Singapore’s Temasek have also made a joint non-binding offer, valuing Haldiram’s around $8.0-8.5 billion. This reflects the company’s dominant position in India’s snack and convenience foods market.
Over the past few years, several private equity firms including General Atlantic, Bain, TA Associates, Warburg Pincus, and Everstone have engaged with the Agarwal family for a minority stake or a controlling one. In fact, even the Tata Group is said to have evaluated Haldiram’s for acquisition but backed out due to its high asking valuation.
While the submission of bids is a significant step, negotiations may face hurdles due to the Agarwal family’s high valuation expectations. However, with billions at stake and global giants vying for control, the outcome of this battle will undoubtedly reshape India’s snacking landscape.
Clouds on the horizon
Political temperatures may be one thing, but the sweltering heat in India is quite the real deal. The weather department said this week that some relief from the heat may be in the offing.
The southwest monsoon is set to arrive in the southern state of Kerala on May 31, the India Meteorological Department said. This will kick off the crucial four-month rainy season for India’s agriculture-dependent economy.
While there’s a margin of error of four days, this arrival date falls close to the historical average, according to the IMD. The monsoon will likely be above average, it added.
The above-average monsoon prediction is particularly positive news for the farm sector. More than half of the country’s net cultivated land relies on monsoon rains. Timely and sufficient rainfall is also vital for replenishing reservoirs used for drinking water and power generation. June and July are the most critical months for agriculture during the monsoon season as most kharif crops, like rice and pulses, are sown during this period.
Market Wrap
After being sluggish for a while, the stock markets bounced back this week and ended the last five trading sessions in the green. While the Sensex ended the week up 1.7%, the Nifty did a tad better and gained almost 1.9%.
Nifty stocks that led to the index rallying so handsomely included auto majors Mahindra & Mahindra and Hero MotoCorp, Adani Enterprises and Adani Ports, Bharti Airtel, JSW Steel, and Power Grid Corp of India. Other counters that gained were Ultratech Cement, HDFC Life Insurance, Hindalco, Titan, and Kotak Mahindra Bank.
Nifty stocks that ended in the red were Tata Motors, LTIMindTree, Dr. Reddy’s Labs, Nestle India, and IndusInd Bank. Other stocks that also clocked losses were Tata Consultancy Services and Tata Consumer, Asian Paints, ITC, HDFC Bank, Larsen & Toubro, Bajaj Finserv, and Bajaj Finance.
Other Headlines
- Bharti Airtel Q4 revenue misses estimate, profit rises 4.4% to Rs 5,234 crore
- DLF Q4 consolidated net profit jumps to Rs 921 from Rs 570 crore year ago
- Shree Cement beats forecasts as Q4 profit jumps to Rs 662 crore from Rs 546 crore year ago
- Mankind Pharma posts 65% jump in Q4 net profit to Rs 471 crore
- PVR Inox’s Q4 loss widens to Rs 130 crore from Rs 83.6 crore year ago
- Jindal Stainless Q4 net profit falls 34.6% to Rs 501 crore
- Apollo Tyres Q4 profit falls 13.7% to Rs 354 crore
- India’s weight in MSCI’s Global Standard index rises to record high of 19% from 18.2%
- Retail inflation eases a tad to 4.83% in April from 4.85%
- Wholesale price-based inflation rises 1.26% in April, the highest pace in a year
- Shriram Finance to sell housing finance unit to Warburg Pincus for Rs 4,630 crore
- Coal India and NMDC exploring lithium mines overseas, says mines secretary
- India’s merchandise trade deficit widens to $19.1 in April from $15.6 billion in March
- New Zealand investigating contamination in spice products of MDH and Everest
That’s all for this week. Until next week, happy investing!
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