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.