How Commodity Trading Works?

Do you think that prices of gold will go up further or crude oil prices are going to fall? You can try entering the commodity futures market if you believe that these predictions have a good chance of coming true. Commodity markets have changed a lot since the age old time and today, fully computerized commodity exchanges – NCDEX and MCX have been set up. If you decide to buy gold today sell gold at a profit after some months then you have to be sure that the gold you buy is pure,  would also need a secure place to store and many more such hassles. Alternatively you can buy gold futures from commodities exchange if you want to invest in gold. Whenever you buy a gold futures contract, you will have to consider the following three points:

1.       Buy the amount of gold specified in contract.

2.       Buy it at the price specified in the contract.

3.       Sell it on the expiry of the contract. You don’t have to worry about actually buying the gold if you sell the gold futures contract before it expires.

We all know that stock futures prices or stock prices are quoted on a daily basis in the stock markets and it is the same way commodity futures prices are quoted on the commodity exchanges.

Margin - you just need to pay a fixed percentage of cost and not the entire amount while you buy a futures contract. Margins are much lower in commodities trading and thus it is cheaper as compared to stocks. You can analyze the commodities that are offered for trading, their contract size and other criteria by getting onto the commodities trading exchange – NCDEX and MCX

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Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining and Realty and Infrastructure. In a nut shell Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.

Reliance Communication’s - Are you buying it?

There has been a lot of interest in Reliance Communication’s plans to reduce debt by 25,000 Cr. this year. The stock is up 10% since August 14, and investors seem to be buying into the turnaround story – Be it by merger, sale of assets, or financial restructuring.

Here are some numbers to think about:

Finance Costs: 3,500 Cr.

EBITDA = 5,392 Cr.

EBIT = 1,171 Cr.

EV = 57,973 (Debt) + 5,811 (Market Cap) – 1,300 (Cash) – 257 (Financial Investments) = 62,191 Cr.

EV/EBITDA = 11.53

Debt / Equity = 9.97

Now, with a 25,000 Cr. debt reduction (from sale of profitable business), 32,973 Cr. Debt will be left. Assuming a 40% loss of their revenue (equal to proportion of business sold to pay off the targeted 25,000 Cr. debt), no further deterioration in credit quality, and no further deterioration in operating margin:

Current Price = 23.50

EBITDA after sale of biz = Rs. 32,35 Cr.

EV after sale of biz = Rs. 37,191 Cr.

EV / EBITDA after sale of biz =11.49

Debt / Equity after sale of biz = 32,973 / 5,811 = 5.67

Okay, so it seems like the company will significantly deleverage its books, BUT these numbers do not include any operating liabilities, loss of revenue from transition, loss of synergy/integration, regulatory hurdles, interest accrued from non-payment of dues, increased competition, margin squeeze, business restructuring costs, legal fees, and potential for dilution of equity to fund future operations. Moreover, it assumes that the revenue contributed by the healthy portion of the business, which will soon be off the balance sheet, is equal in proportion to that from the portion of the business retained.

Evaluating the business in the rosiest possible scenario, the one that Mr. Anil Ambani is selling, it will still take more than 10 years for the company to redeem its debt on an EBITDA basis with the leftover business.

Let’s ‘get-real’ for a moment though – With the weak competitive, operating, bargaining, and financial position of the business, it’s highly unlikely that investors will ever see a positive bottom-line sans a (significant) dilution of their equity. So, the simple question is – Are you buying it?