Another salvo at Satyam!

Its probably the worst of times for Satyam if news reports are to be believed. World bank has reportedly banned Satyam on account of data breach. The charge is pretty serious - It would take a lot of effort and time to repair the damage!

Satyam - Issue of Corporate Governance

Satyam NSE 157.10 -69.45 (-30.66%)

I find it really strange when media and supposedly educated people talk wrong! First, no book on corporate governance says, diversification is wrong. An IT company is eligible by all rights to diversify and expand across non-core areas of operation and this includes real estate. The issue of corporate governance in this case should confine to the following.

1. Should the shareholders be consulted for a deal size of greater than $1 billion? If yes, then Satyam may have gone wrong with respect to corporate governance principles. It is to be noted that HCL Tech completed the Axon deal without consulting its native shareholders. One may well argue on the majority shareholding of the promoter, but the bottom line remains the same. Infosys did not consult its shareholders before completing the Philips BPO deal. So, its not prudent to argue that Satyam had to consult its shareholders before completing such a deal.

2. Second, should a company move out of space and invest in a non-core sector when the sector is heavily beaten down?

Its baseless to argue and say that companies shouldnt look at non-core sectors for growth or strategic fits. Lets take Wipro for instance. During the late 70's, Wipro was known to be a strong Vanaspati brand and had no IT exposure. So, do you prevent Wipro from using its cash when it intended to invest in IT(which was not a very good business to be in way back in 80's)?

What corporate governance should focus is the logical fit of the deal and if things are carried out with utmost transparency, integrity and honesty. Lets look at the prospective logical fit. I am quoting the points even though Satyam management hasnt highlighted on it.

a. Satyam could emerge as the prefered IT/BPO partner for Maytas.
b. Maytas could benefit by handling all maintanence related contracts for Satyam facilities as well as be the key infrastructure developer for Satyam facilities marked for the future. This by itself means significant cost savings from Satyam point of view and great revenue addition for Maytas subject to the fact that the IT business grows.
c. Maytas could help Satyam move away from city and expand infrastructure in towns closer to city. The advantage would be cheaper operating cost, less attrition and better quality of living for Satyam employees. If Maytas builds a SEZ by itself away from city, something like the Sriperambadur belt which is 50 km from the city of Chennai, then it could be bring in huge advantage for Maytas and Satyam.

3. Looking from a cost perspective, it is true that Satyam is paying a huge price to acquire a strategic stake in Maytas. But then, HCL acquired Axon at huge valuations too! Axon was valued at 30-times PE at 600 pence/share. Why would you want to pay such a price when top companies like TCS and Infy are trading close to 10-14 times PE? Acquisitions like these have to be looked strategically and not purely based on current value. If the question is based on value and if Satyam is proved wrong and biased towards its own party(son-promoter transaction), then it could well be an issue of corporate governance.

Corporate governance should look at ethical and correct manner of doing things. It does not say anything wrong on diversification.

Dow slips

Dow 8374.65 -459.39 (-5.15%)
S&P CNX Nifty 2682.90 -72.20 (-2.62%)

At this point, Dow is trading in the negative territory. I have maintained earlier that the 10-year low of 7591 is a critical level to watch. Looking at the current economic environment, it is only a matter of time before this critical level is breached. Once this level is broken, Dow would enter a long-term bear market. It would be interesting to look at the charts once 7591 is breached. The National Bureau of Economic Research confirmed that the US economy is in recession since December 2007. There is no doubt that the world would take a while to bounce back. However, it’s important to know that every recession lays a strong foundation for the next bull. I would look at 2009 as the year of consolidation and this would probably be the best time to buy once a clear bottom is in place. For now, I would prefer to sit back and watch!

S&P CNX Nifty lost most of its intra-day gains today, signaling the end of the “bull” within the “bear”. As mentioned here , the Nifty did trade with a positive bias and ignored even the worst of news. Technically, I would look at 2654 as a critical level on an intra-day basis. If Nifty breaches this level, then one should short positions to avoid losses. For the immediate term, 2553 continues to be the level to watch. There is no change in my bearish stance maintained earlier.

S&P CNX Nifty - Interesting level

S&P CNX Nifty 2752.25 +98.25(3.7%)

S&P CNX Nifty broke an important resistance level 2708 which was Mondays (24th Nov 2008) close. Tomorrow’s close would be critical to assessing the next course of the market. If S&P CNX Nifty closes above 2799 decisively, then it could signal a fresh uptrend for the next few days. I don’t expect this to happen and upside looks limited as 3100 has emerged as a strong resistance level. Global indicators as of now are not supportive for the markets to break the critical resistance levels.Nifty would confirm the downtrend once it breaks 2524. Let’s wait and watch!

Strategy:What should you do? - II

I hope you have read my previous post by now.

Do you sell everything you hold in a bear market? That’s a tough one to answer.

I wouldn’t advice a complete sell-off, but hold those which you think can grow well over a period of time. The following factors would be critical to your decision:

- Fundamentals of your stock
- Holding period
- Returns expectation
- Price at which you entered the stock


First, the fundamental of your stock is very important. For example, Bharti Airtel was probably one of the best picks in telecom some time back. Though nothing has changed much since then, it’s not a value buy at current levels. For one, it has entered a new business (DTH) which would squeeze its margins for the next 5 years at least. Second, I believe its ARPUs have peaked. From here, it could go into a consolidation phase with slower growth in ARPUs if not deteriorating growth rates. Looking at these factors, its probably headed lower considering the market fundamentals. I would probably re-visit the stock for long term below 400 levels.

If my holding period for the stock is around 10 years, I would probably part-hold Bharti Airtel and add more at lower levels (thereby cost-averaging). I would hold because revenues aren’t declining as yet for the stock. The new business would dent margins in the short term, however would contribute to greater profits towards the end of my holding period. However, for someone with a 2-3 year view or maybe lesser, it’s not the best stock.

The current bull-run has already seen spiraling growth in the stock. From here, it may not give you something like what you have seen in the past. Remember, the stock rose from Rs 30 levels in 2002! I would probably pick the stock as a safer pick for the long term with medium risk. It can still give you 30% YOY if you are inclined to hold for a decade or maybe when the next Bull Run emerges!

All said and done! If you entered the stock(in this case Bharti Airtel) at the peak (or its current 52-week high), you would be better off selling the stock at current levels (600+) and enter at sub-400 levels. For one, you would hardly see any returns on the stock for the next 3 years. Its not known to be a good dividend payer, so you need to think twice before retaining something which doesn’t pay you for long! It’s like working for an employer for free in expectation of strong growth ahead!

Strategy:What should you do? - I

For the past few weeks, I have been focusing on selling some of my holdings. I exited all of Asian Hotels (@300), Bharti Airtel (@700), and Allcargo global (@ 745). Of course, I mentioned my strategy on ICSA here.

There have been many who have been very skeptical of selling stocks at loss. Some analysts somehow on hearing blur-chip names, by default, recommend a hold for long term! Well, I keep saying, “It’s ultimately your money doing the rounds”. Here’s a case for understanding.

Let’s say, you bought Infosys Technologies during the highs of 2000 at a price of Rs 1500(after adjusting bonus and split). One can see from its historical charts that it touched a low of 269 in the year 2001 and a high of 2439 during the year 2006.

Now, let’s say, in the year 2000, you decided to hold for long term as many knowledgeable analysts recommended. Let’s take the best case scenario of selling the stock at 2439 during the year 2006.

You have made a gain of 939 Rs/share in 6 years time which translates to a 10.4% annual return. Considering the dividend/share, you would have made around 11 percent annually. This would be your best case scenario. Many would probably be satisfied with this kind of return way back in 2003 when interest rates were low. Considering the levels of 2001 and the interest rate scenario then, you would have been better off investing in fixed instruments as they would have earned you the same return with surety and security!

Stock markets are all about timing. While it’s difficult to time, one needs to take a calculated judgmental call. Fundamentally, I thought Infy was fairly valued at around 700(during the year 2001). However, technically way back, it was showing no signs of bottoming out. Economic indicators too weren’t supportive to the stock. Given this, I would have probably entered the stock at approximately the same level (700) during the year 2004 as it showed strength at every lower level. Note that this price is nearly 150% higher the lows it made in 2001. At my entry price, I would have made big money (>50% returns) even if I sold at a median price of 2006!

The gist is – Don’t fear to sell just because you’re at loss. You could end up losing a lot more if you don’t sell. I have taken a top performer in this example. But, many companies as you would know wouldn’t reach their highs even after a decade. One needs to analyze fundamentals from time to time. For example, Arvind Mills used to trade around 300 during the early 90’s. Today, it is struggling to stay at double-digits and hasn’t managed to reach anywhere closer to 300 in two successful bull runs (in a 15-year span). And remember, way back in the 90’s, textiles and manufacturing was a good space to enter just as IT is today.

Again, don’t just sell at whatever price you see on the board. Look at technicals and fundamental indicators and then sell closer to the high-points. You would get adequate opportunities to re-enter the stock at lower levels. But, how does one decide on selling a stock? Do you sell everything you hold in a bear market? I would answer this in my next article. Keep watching!

Market Update: Nifty would fall 50% more

S&P CNX Nifty 2635 -48.15 (-1.79%)

S&P CNX Nifty broke the 3 year support of 2632, which means it’s only a matter of time for the next lower support to happen. I mentioned earlier that the S&P CNX Nifty has merely broken the 3-year low recently whereas the Dow has breached the 5-year low decisively and is headed closer to its 10-year support.

I now peg the next lower support to emerge closer to the 5-year low of 1470. I don’t expect a sporadic fall to 1470. The fall would be phased giving ample exit opportunities. The next support level to watch would be around 2316 for the immediate term.

This is nearly 50% lower from current levels! Traders – stay away for now and Investors – sit with cash till further trends emerge.

Dow trades weak

Dow 8068.96 -213.70 (-2.58%)
Sensex 9536.33 -303.36 (-3.08%)

I mentioned here sometime back that the 10-year low of 7591 is an important level to watch. Looking at the rate of fall and news flow, this level is most likely to be broken within the next few days or a couple of weeks at most. Its certainly one of the worst times in history!

For the Sensex, I still maintain a bearish trend. The Sensex has still not broken its 5-year low which is an important level to watch. Once the 5-year low is broken, I expect a technical bounce. Till then, it’s a wait and watch.

Portfolio Changes - What am I doing?

Wockhardt NSE 108.05 -0.10(-0.09%)

I sold Wockhardt for a quick profit and would look to re-enter at 100+ levels. I'll continue looking at some attractive stocks for investment with a short and long term view.

Portfolio Changes - What am I doing?

Sensex  9734.22  -385.79 (-3.81%)

ICSA  NSE  191.85  +6.7 (3.62%)

Today was a good exit opportunity for ICSA. I am apprehensive on the stock based on the following.

1. The stock has completed most of the retracement from its low of 143. From here on, there is very little upside left.

2. Stock could touch 100 in the short term at which point, I'll look to add again.

3. The upswing to 200 levels was seen with low volumes whereas the fall was with higher volumes. Hence, the stock continues to be weak on the charts.

4. FII ownership is close to 50% which means the trend will largely be controlled by one segment. The past quarter has seen some short term buying and selling from FIIs. If you look at the current holding structure, its easy to understand that most of them have brought down their cost of ownership. Many FIIs have sold the stock at higher levels and have bought lower. The practice looks malicious, however this is how it will be till SEBI bans short-selling!

Portfolio Changes - What am I doing?

Today was a good exit opportunity for some of my holdings. I exited my positions in Bharti Airtel and Asian hotels. I introduced Wockhardt to my portfolio with a short and long term view. I recommend being cautious at current levels. Do not over invest and divest part of your portfolio where you think there is more downside.

Dow dilly Dallying

Dow   9180.69     +189.73 (+2.11%)

Till next week when US Presidential elections begin, Dow would probably trade with a flat to slightly positive bias. It will be interesting to watch the Indian markets towards the end of this week - S&P CNX Nifty has posted two consecutive gains this week. On the monthly charts, the Nifty has posted 4 consecutive losses after every two consecutive gains. So, today will be decisive as far as the behavioral patterns go.

Theory: Gains Vs Losses

Is investing at lower prices the best strategy? Let’s say, a stock is priced at “x” today and is expected to perform better in long term. The analyst in you says, that it would be 5x by the end of the fifth year due to several long term performance measures taken by the company. Given that the performance of the stock would improve over the long term, you have two strategies in hand: purchase the stock at lower levels as of today and then wait till it appreciates or buy at a future date when performance improves. You are also aware that till performance kicks in, the stock is bound to be volatile and may give negative returns. What would you do?

Well. I would do this. If I’m sure of the fundamentals of the company and believe that the company is reasonably (or lowly) priced as compared to its peers, then I would go outright and buy the stock. Why would I do this considering the fact that the stock will be volatile in the short term?

The reason can be better explained with an example. Let’s say, I buy stock “x” at Rs 100 and expect a 20% compounded return on the stock in the long term. Now, due to market sentiments the stock dips to Rs 50. The stock posts a notional loss of 50%. Now, let’s say I buy the stock at Rs 50 and sell it at Rs 100. My gain is 100%. The theory is the gains would always outperform the losses.  

Diwali fireworks at the Market!!

Sensex   8701.07    -1070.63 (-10.96%) 

Well, the markets seem to be reading my blog every morning! Its suprising to see so many predictions come true. I'm happy not being the typical analyst media channels follow and bring some sense of accountability for what I quote!

The fall to 8800 was expected, however the pace of the fall was a little unexpected. Given the pace of the fall, the free fall could enter an oversold state(meaning, some more fall is possible). As I quoted earlier, there would be a sporaidic rise soon once the fall completes. I would pick some trading positions after watching the markets on Monday and Tuesday.

Ah! I just read a CNBC TV18 interview here http://www.moneycontrol.com/india/news/market-outlook/long-term-investors-should-start-investing-now-experts/363238

I cant dispute judgemental calls. However, I wouldnt advice buying when the markets are in a fall frenzy. You need to wait for some stability to come before you park your investments. When the markets fell 30% at 14000 levels, everyone adviced to invest for long term. And at 8700, it still remains the same. People can say what they want to, but ultimately, its your money doing the rounds. Invest when you think the time is ripe and when you think you are paying the right price.

Targets for Sensex

Sensex 10169.90 -513.49 (-4.81%)

Sensex formed a double-top at 17600 first. This confirmed the downtrend. 50% downside from 17600 should take it around 8800 levels. The third top it made at 15504 was close to a double-top. So, one cannot rule out a further slide to 7750 levels. Once the downside completes, there should be a sporaidic rise in Sensex which would eventually take it closer to current levels(10000 or above).

Fall starts again!

Dow 8618.37 -415.29 (-4.60%)

I mentioned on Oct 16, 2008 that Dow will trade in positive territory till it dips below 8451. Having seen a few days of upswing, Dow now looks to head down and break the monthly support of 8451. For the immediate term, the next down-swing has started. At the moment, the 10-year low of 7591 is an important level to watch.

Analysis - ELSS Funds

As everyone starts to plan for tax-saving towards the end of the year, one may have several questions in his/her mind on where to park his/her money for tax-saving as well as better returns. The current economic environment offers adequate room for growth for ELSS funds and hence I would stick to suggestions under this domain.

I wouldn’t discuss absolute performance or ratings in this section as that is generally covered in most of the popular financial portals like http://www.valueresearchonline.com and http://www.easymf.com/

However, I would analyze some funds and suggest why I would buy/not buy in the current environment.

1. Fidelity Tax Advantage

Fund Manager: Sandeep Kothari
Since: Jul – 2006

I like the fact that the fund manager is experienced and has stuck to the fund for a reasonable period of time. This brings some amount of trust on the performance of the fund.

Asset Allocation
As on 31/08/2008
Equity 88.61%
Debt
Others 11.39%

The fund as on 31st September 2008 increased holdings in Infosys Tech (3.48%), Bharti Airtel (3.05%), ICICI Bank (2.8%), Hindustan Unilever (2.55%) and HDFC Bank (2.22%) amongst the top ten holdings. It reduced exposure in Reliance Industries (6.44%), HDFC (4.09%), SBI (3.24%) and BHEL (3.09%).

Given that the fund has significant equity exposure and lower cash/debt position, the fund is bound to loose in a falling market. The fund manager has taken smart calls in reducing exposure to RIL and other stocks as stated; however, the fund still has high exposure to RIL. I am particularly bearish on RIL and other stocks held in the portfolio as they would be the most to fall in a falling market. This portfolio suites investment once the market stabilizes. For the present, I would like some cash exposure and adequate equity cushion (FMCG and Pharma).
Investment Valuation Stock Portfolio

Portfolio P/B Ratio 5.55

Portfolio P/E Ratio 23.14

The funds P/E and P/B ratio are still high which means the downside risk is higher.

2. Franklin India Taxshield

Fund Manager: Anand Radhakrishnan
Since: Apr – 2007

The fund manager has been around for a lesser period of time. However, it’s not an alarm signal as the fund hasn’t changed its style of declaring dividends on a regular basis when the markets were ripe. I like the dividend distribution policy of the fund which reduces risk in long term.

Asset Allocation
As on 31/08/2008
Equity 92.68%
Debt
Others 7.62%

The fund increased its holdings in Bharti Airtel (7.16%), RIL (6.12%), BHEL (4.49%) and L&T (4.3%) while reducing exposure to Infosys Tech (6.04%) and HDFC (5.7%). I’m extremely bearish on all the top stocks held by the fund. The fund manager has done well to increase holdings in “cushion” stocks like Nestle, Hero Honda and Marico. However, I would have like higher allocation to these stocks rather than the old performers which the fund manager still seems to betting on! The equity allocation is significantly higher at 92.68%, which presents good amount of downside risk.

I am partly happy on the fund managers actions, hence would recommend a part-buy.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.90

Portfolio P/E Ratio 22.88

P/E and P/B is high for the fund and hence the risk id higher.

3. Sundaram BNP Paribas Taxsaver

Fund Manager: Satish Ramanathan
Since: Sep - 2007

The fund manager has been around for a lesser period of time. However, he brings in good amount of experience having worked with Franklin Templeton MF for a long period of time. I have tracked his performance during his tenure in Franklin Templeton and have found it to be satisfying.

Asset Allocation

As on 31/08/2008
Equity 63.64%
Debt 7.61%
Others 28.75%

The fund has substantial cash/call/debt allocation which is one of the reasons for outperformance over the previous month. However, as I see during the later days of October, the fund has been underperforming the markets and some other peers in the group. I suspect some equity re-allocation or portfolio shift. During the month of September, the fund increased exposure in HUL(4.86%), ITC(4.36%), RIL(3.94%) and ICICI Bank(3.02%) while reducing exposure in Nestle(3.81%) and Tata Tea(3.18%). Given the cash exposure as on September '08 portfolio, the fund is a good defensive bet and a good addition to your ELSS portfolio.

I’ll check the funds October portfolio once it releases and then take a final call.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.43

Portfolio P/E Ratio 16.47

The fund has a reasonable P/E ratio and hence is suitable for investment.

When to Buy?
Given that ELSS has significant equity exposure, they are governed by equity market movements. Hence, I would recommend investors to keep a watch on support levels discussed in the blog and invest closer to support. For instance, the next Nifty support looks to be at 2663. Another way of looking at it is to look at the support levels of top ten stocks held my MFs and then invest closer to those levels. But this can get very complex and hence I would say, just look at the Nifty close and invest. You can probably phase your investments over the months of November, December and January. However, I don’t recommend an SIP way of investing as of now. SIP’s if you note, have underperformed the market over the last two years.

Up or Down?

Sensex 10223.09 +247.74

Nifty 3122    +48.45

One could analyze the technical trend of the market in many ways. One way would be to take the Nifty or Sensex chart and then chart a trend based on patterns. Second is to take the top ten Nifty stocks and analyzing their technical trends.

I looked at the second method, having discussed the first previously. I'll focus on three key stocks which have and would eventually contribute to Nify/Sensex trend. Here are my observations.

1. RIL which contributed to significant portion of the fall is now close to its 2-year low. If it breaks 1174 decisively, then it could be headed lower. I have always stressed on my law of markets – “The stocks contributing the most to the rise of index would contribute the most to the fall whenever it happens”. It is only a matter of time before the law unfolds. RIL doesn’t look good fundamentally and technically.
2. Next, let’s take the case of ICICI bank which is another big contributor to the fall. Well, there are different views on its fundamentals. One may argue that it is one of the strongest banks in terms of capital adequacy ratio, insignificant exposure to sub prime etc. Ah! For once, let’s look at it logically. With such high interest rates and inflation, retail loan portfolio is sure to witness a slowdown. One has already seen a huge dip in home loan portfolio. New home sales are hard to come by, so banks would face some pressure on demand for fresh loans. Automotive manufacturers have indicated a slowdown in sales, which means there would be a corresponding hit in auto-loans. Corporate loans would be hard to come by, given the current economic scenario. Hence, fundamentally ICICI bank is not one of the greatest picks right now. Technically, it has already broken its 2-year and is headed further down. A temporary bounce was expected and is already underway.
   
   
3. Infosys is a victim of the current economic uncertainty. It broke its 2-year support and looks to head further down.

Given this, I don’t see the fall to stop as early as this. It should take a while before we would begin to see some confidence. The other case is to look at how markets behave internationally. If you look at Dow, it has already broken its 5-year support. The Nifty on the contrary has only fallen a little below its 2-year low.

Dow rises

Dow 8,979.26     +401.35    +4.68%

On the monthly charts, Dow looks positive till it breaks 8451. I would prefer to watch this level on an intra day basis for further conclusion. Some buying looks to emerge at these levels which is a good sign. However, it would take some time to bottom out. So, one cannot conclude that the bulls would soon be in.

International markets including India would take some cues from the Dow close. So, I expect the Sensex and Nifty opening on a positive bias. Local participation in India especially from mutual funds is a cause of worry as most of them have very little cash in hand. Some of them have churned their portfolio to reduce the impact of the fall. This probably makes us overly dependent on FII money.

RBI infusion of funds

RBI's current move in advice from the government would bring some respite to the markets, however not immediate. It is only natural that Mutual funds would need enormous cash in order to invest in such a falling market. In the short term, there's enough to worry for fund managers. However, easing the liquidity situation is a timely step by RBI.

Trend is down

 S&P CNX NIFTY    3338.40       -180.25(-5.12%)

So far, Nifty and Sensex have been behaving predictably. For the immediate term, I see Nifty to take support closer to 2663. It has broken 2-year support which means its headed down further from current levels. Traders could buy closer to the next support in expectation of an intermediate uptrend. There's not much international support, so I dont see any immediate triggers for the market. 

Sensex Update

Sensex 11483.4   +174.31

Sensex lost most of its intra day gains towards the end of day and only drifted southwards from its high of 11870.22. I see the start of a fresh downtrend. Sensex could fall further without touching its next resistance level of 12600. Traders should remain cautious at current levels.

Trading recommendation: Buy PNB

PNB 499.5    +39(8.47%) NSE

Buy PNB with a stop loss of 460. This is a delivery based short term trading recommendation. Exit at 550-560 levels. I expect PNB to reach the target quoted before its quarterly results on October 31, 2008.

Bounce back!

Sensex 11,309.09    +781.24(7.42%)

As mentioned on October 6, 2008 Sensex tested the next lower support. Today is probably the start of the next intermediate bull within the bear rally. The next resistance would be around 12600 levels. Traders can use this range to buy and short positions.

Dow sees Red!

Dow 9447.11

I mentioned earlier that for the short term 9700 is an important level to watch. The level came and went by! At close today, Dow dropped 508 points to close at 9447.11. This means that it has broken its 5 year support. If Dow moves below 9333, then it completes a 33% retracement from the highs of October ’07. Since it’s very close to its support range, I would wait and watch till further trends emerge. An intermediate bounce would come by, though the medium term trend is down.

Sensex trends

Sensex 11,801.70

As predicted, Sensex has started its intermediate downtrend. Fundamentalists are attributing it to a huge FII sell off. Well, that is true and is happening! Where is it going to stop? No one has a clear cut answer.

Based on chart trend, I have spotted the following. I am giving rough figures here and may not be accurately match the actual Sensex numbers.

1. Sensex topped at 20873 during Jan 2008 before starting its downtrend. It made an intermediate bottom at 14809. This translates to a 29% fall. It then had an intermediate rise to 17600 translating to an 18% retracement.
2. It started its downtrend to 12576 from 17600. This translates to a 28.5% fall (roughly 29%). After the bottom, it made an intermediate top again at 15504 translating to a 23.2% rise.
3. The third leg of fall expectedly would fall in the same range as the previous fall. Hence, I expect the next support at 10850-11200 levels.

At this point, traders are advised to buy and wait for an intermediate uptrend. The fall would be sooner than the rise -  I expect Sensex to touch the quoted support level within a few weeks(and not days).

What’s happening to ICSA?

A stock which grew at over 50% every half-year and been a darling for FII’s is now witnessing heavy selling pressure. And it’s not falling because fundamentals have changed! With an order book of Rs 900 crores and no signs of sales/profits dipping, it’s certainly not a sell even in deteriorating market conditions. Then why has it fallen 36% in just one month? Here’s my analysis on the stock. 

1. The promoter holding for this stock is considerably low at less than 20%. FII holding has always been higher. September 2006 data pegged FII holding at 39.15% while the promoter holding was at 17.09%. This hasn’t changed much over the years. FII holding as on June 2008 stood at a staggering 47.83% while promoter holding was at 18.47%. It’s only evident that such a stock with very little diversity in terms on its holding structure would fall in prey of the hands of high net worth individuals/promoters/FIIs.
2. The stock changed hands from GOLDMAN SACHS INVESTMENTS to DEUTSCHE SECURITIES on Sept 18 2008. In fact Goldman Sachs has been selling the stock in parts at various times during the year.  Average volumes for the stock have been on the higher side this month.
3. Apart from the bulk deal which witnessed change of hands, it is still not clear as to who might be selling the stock at such a low price. The Sept 2008 data expectedly to release by end of October would show some clarity on this. For now, it looks like the US based FIIs like Morgan Stanley, Merrill Lynch and Goldman Sachs have all been selling. It looks like a distress sell to me than anything else. It just shows how desperately these investors need money to salvage their business!

Fundamental picture still looks very strong. I wouldn’t like to take a contrarian call until I see some dip in sales. Technically, this stock is breaking support levels every quarter. So, it’s hard to predict the long term picture. For the immediate term, I expect some buying to take place at 200-210 levels.  Intermediate uptrend should take the stock to 270-290 levels.

Note: This is a high-risk high reward stock predictably from its holding structure. Long term investors are advised to stay away from this or book profits/loss once the target is reached. For high risk/aggressive investors, I recommend averaging your positions at 200-210 levels. Fresh buying is not advised as there are lots of fundamentally attractive stocks with better price control available.

To know more about this company, click here

Road Ahead

Dow                     10,365.45 

The Dow broke an important support level of 10440 which signals further downside. However, it’s likely that it would gain some ground before falling again. For the short term, 9700 is a very important level to watch. Only the worst of the news would pull the Dow below this level. I don’t think the financial turmoil is enough to pull Dow down below this level. Having said this, the long term bull market for the Dow is still intact.

S&P CNX Nifty 3921.20

An analysis of the charts of Nifty for the years 1996-99 shows a classic triple bottom. Hence, it was only a matter of time before the start of the major Bull Run. Late 2007 saw Nifty top; however there is nothing to signify the end of the long bull run. The next few days will be interesting to watch. If Nifty breaks 3817 decisively, then this would signal a further downfall to support level of 3576. If Nifty continues to rise, then there could be a case of a double bottom being formed. This could be the start of a fresh uptrend again! However, given the negative news flow and global economic scenario, it’s only a matter of time before 3576 would be tested.

 

Market Update

As mentioned yesterday, markets exactly behaved in a predictable fashion. Investors need to stay catious at current levels. The Dow is receiving some good news in the form of Treasury guaranteeing money market mutual funds. Dow might end flat or slightly positive today. Monday is going to be crucial for both the Sensex and Dow. Short and medium term investors should sell their positions in banking and financial stocks, especially those with significant international presence.

Dow close to next collapse

The Dow is showing clear patterns of crash. Todays session offered best opportunity to sell. Indian markets could replicate this in todays session, but again it should be used as an opportunity to short your positions. Long positions can be held if fundamentals and historical values support.

Analysing Analysts!!

When I wrote on an impending crash 6 months back, not many were riding on the same boat. I sometimes find the biggest fools in “Analysts”. When the market was trading at never-before PE this January, no one prompted a sell. Business channels promptly expressed bullishness ahead and a great future for the financial sector. And la! The financial sector has given so much profit to investors than one could have imagined (pun intended). The gist is: Do you own homework. Don’t ignore fundamentals. And finally, don’t just go by what analysts say!

There’s no way companies can get out of a serious credit crisis just on the basis of a few rate cuts by Fed. It’s serious because the backbone of the US economy, the US financial sector is in ruins. I foresee the start of the next Bull Run in 3 years. However, current movements nowhere suggest bullishness. For Sensex, the next support is at 12600. However, I don’t expect this level to hold for a long time. 

Market Update

The current day’s upswing of 516 points on the Sensex might sound relief for a lot of investors who are still holding on their investments from higher levels; however, not for long as this signals the beginning of a fresh downtrend. This rise is triggered mainly by interest rate sensitives like the banks. If you look at the chart of SBI, it has already completed a 50% re-tracement and is headed down further. For some banks like PNB, this break looks very positive as it signals a fresh intermediate up move. For the intermediate term, the Sensex is expected to be ranged from 13800 to 15500. Sensex has marginally broken the resistance level of 15504. However, an established break would alone confirm a fresh up move. For the next week, expect the market to slide down further as its closer to resistance.

Stock Screener

JK Paper(Price as on August 20, 2008: Rs 30.15[NSE])

Invest for medium and long term

JK paper is a strong brand in the paper industry and has been a consistent dividend payer. Having declared a consitent divindend of over 15% over the past 5 years, it is one of the best picks in the paper industry. Based on the current price(Rs 30.15), a dividend of 1.5 Rs/share works to approximately 5% dividend yield.

Further, its sales turnover has grown consistently at over 10% for the past 5 years signifying the strong demand for its products. Operating profit has been inconsistent, however has shown a similar growth pattern as its sales.

The current inflation might dampen its expense sheet. This means for the short term, JK paper might take a hit on its profit. However, with the promise of elections and the next government assuming charge, inflation will soon be under control.

A PE of 5.2 and a BV of 52, it is one of most attractive stocks in the paper segment.

Summary: Buy between Rs 28-30 and hold for a target of Rs 50-60 in one year.

Star Paper Mills [Price as on August 14, 2008(NSE): 27.6]

Star Paper Mills can be a good long term bet, however for the short and immediate term, it looks to head lower.

An analysis of its results from year 2003 onwards shows that the demand situation hasn’t weakened over the years, which is a sign of promise. The fact that sales have grown from 158.03 cr(Mar 2003) to 211.02(Mar. 07) strengthens the fact. However, profits have declined sharply largely due to rising expenses and not because of fall in sales. From its balance sheet, it’s clear that the company is facing pressure passing on raw-material cost (and other expenses) to consumers. The situation is likely to worsen in the short term due to rise in inflation.

Summary: For the longer term (>5 years), this stock shows good promise. One can expect the stock to rebound to its 2007 highs of 90 levels. Accumulate the stock if it dips closer to 20.

Natco Pharma [Price as on August 14, 2008 (NSE): 78.7]

I am encouraged by the performance of Natco Pharma over the years. This is one stock with great future and is presently available at good valuations.

A look at sales performance from March ’04 onwards shows consistent growth of 10% and above. Expenses in comparison to sales are very much in control and this is reflected in the net profit zooming to 40.05 cr in 2008 from 13.08 cr in 2004. The other income component with respect to sales has very much been consistent – this is a healthy sign. The stock is currently available at 1 times book, which is quite cheap for a stock with consistent performance. With a PE ratio of 5.6, it’s quite a mouth watering pick!

Summary: Accumulate at current levels and hold for long term.

Site References:

1. http://money.rediff.com/
2. http://economictimes.indiatimes.com/
3. http://www.icicidirect.com/ for iCharts
4. http://reliancemoney.com/
5. http://moneycentral.msn.com/

India - BUY Or SELL?

A lot has been said about the Indian markets in the past - liquidity driving the markets, strong FII inflows, booming economy and so on. Well - As many pause to ask the question - BUY OR SELL, its important to take a fundamental view. Analysts sound like nuts! When the markets were booming this January ’08, everyone screamed “BUY BUY BUY” and that too in a sector which was supposedly going to collapse in the next few months (banking)! A safe way to avoid criticisms like these is to say “Buy for long term”!! Added to this, their own stigma of recommending stocks which are either on their portfolio or clients portfolio is well known. There are instances of many brokerage houses selling after issuing a buy recommendation. Will someone provide an ethical and logical recommendation? Here, I try to answer questions through logic, reasoning and data. Some parts of the article are directly taken from my earlier article dated 4 months ago – it still holds!

A couple of things from the past - FIIs were net buyers in equity for most of 2001 except September when the world markets tumbled. MF's however were net sellers for the year. So, the fundamental logic on FII money driving the markets is not completely true. Secondly, FII investment since 1999 stands at an astronomical sum - you would need some time to count the number of zeros!! If at any time, they were to emerge as net sellers, markets would tumble like bunch of cards!! Markets are bound to move up and down due to various macro-economic factors. Fundamentally, if you look at the PE range of markets, we ranged somewhere between 14-20 from 2003-2007. Currently, markets are valued at 17 times PE. This means, there is room for another 20 percent downside just by looking at the low PE range of the market.PE itself is a tricky term. While, Infosys may be valued at 19 times PE, Tata steel is valued at 8 times FY08 PE. And, both are strong brands with strong growth rates. So, it’s not fair to judge a market based on PE. Is 14 times PE expensive? Yes, if you compare with other emerging markets like Thailand. PE is a mix of various factors - economic indicators, Brand image, growth rates, political stability etc. So, if the outlook for India remains strong at 7-8% growth YOY irrespective of global economic indicators, its quite possible that the current PE level would be sustained. IT companies would however face some pressure due to rupee depreciation and a possible US slowdown in terms of IT spending. Many may argue that fundamentals are still strong for exporters. As far as one can read, the demand situation has incredibly slowed down. Fresh business accruals are hard to come by and existing ones are on the path of survival. To say that the existing business would sustain and contribute to growth isn’t logic! Sustained economic development coupled with new business demand alone can propel growth.

Further, an increase in interest rates to control inflation is a temporary phase. During this phase, Indian markets may not see great growth rates. To sum, my sense is that Indian markets are fairly valued at the moment with adequate room to fall. Investors need be patient not just to hold their investments, but also wait for the right time to invest. You might not always pick the bottom, but ensure that you have some cash to invest when everyone else is selling across the board. Based on historical analysis, my sense is that the markets still have some room to fall.