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Wednesday, July 29, 2009

Stock Chart Pattern - Marico Ltd

Before analysing the stock chart pattern of Marico Ltd, it may not be out-of-place to look at their Q1 results and some projections.

Consolidated net sales grew 16.8% Year-on-Year and volumes rose 14%. Gross margins expanded 3.5% due to a fall in prices of raw materials. Advertising costs increased by 1% to 12.2% of sales and other expenditure increased by 2%. PAT grew 29.6% Year-on-Year to Rs 60 Crores.

These figures look pretty impressive. Positive cash flows from operations and regular dividends are other plus points. Debt is increasing to fuel the growth in overseas markets. The high percentage of advertising expense-to-sales is another concern.

As per a report by Motilal Oswal, the PAT is expected to grow at the rate of 20% for the next three years. At the current price, the stock is trading at 22 times its projected EPS of 3.9 in '09-'10 and 18 times its projected EPS of 4.8 in '10-'11.

Fundamentally, this is another strong stock from the FMCG sector and the 'BUY' call seems justified. The 2 years bar chart pattern of Marico Ltd gives a different picture:-


The Re 1 face value stock made a top at 83 and a bottom at 47 in Jan '08. The bear market in the stock lasted till Nov '08. It tested the Jan '08 low twice - once in Oct '08 and once in Nov '08.

The up move that started from Nov '08 took the stock above its 200 day EMA in Feb '09 and its 50 day EMA crossed the long-term average in Mar '09. The stock moved into a bull market when the BSE Sensex index was making its bottom!

From Apr '09, the rally became stronger with higher volumes. Earlier this month, the stock sailed past its previous high and recently hit 91 before starting a bit of consolidation.

The bull rally is definitely looking stretched. Except for the MACD, which is a lagging indicator, the other three - RSI, MFI and slow stochastic - have all corrected from overbought zones and are showing negative divergences from the stock chart.

But most ominous is the difference between the stock, its 50 day and 200 day EMAs - which typically warns of a change of trend. In Jan '08, the stock went way above its 50 day EMA, which in turn was way above its 200 day EMA. The stock had corrected sharply.

In Nov '08, the opposite happened. The stock was way below the 50 day EMA, which was well below the 200 day EMA. The stock shot up shortly thereafter.

Bottomline? We have a similar situation on the stock chart pattern of Marico Ltd to that of Jan '08. Will the pattern repeat? With technical analysis, one can never be certain. Just let me ask you this - after seeing this pattern, will you bet on the up side or on a correction? If it corrects, how low can it go?

(Thanks to reader Eswar for suggesting this stock.)


Eswar Santhosh said...

Just an attempt based on first look (and more on math and "hunch" than on "analysis" :-))

During the first correction - I think the 50 EMA is around 67-68. The 200 EMA is around 62 or so. The stock corrected from 83 to 47 or (CMP - 50 EMA) to (200 EMA at that time - the same difference).

Now - around Rs. 88, it is about Rs. 13 higher than 50 EMA. Considering the 200EMA at 65, it could correct to 52 or so. So a range of Rs. 50 - 55 could be the target if a similar correction occurs?

(I hope you do not give up TA after reading this comment :-))

Sumit Vadodaria said...

I dont feel it will see 50 in next year or two again..This seems a break out and can reach 160 in next two years.

Subhankar said...

@Eswar: You get an 'A' for effort, but a 'C' for not being observant enough!;-)

The 50 day EMA is at 76; the 200 day EMA at 66; the stock is at 87 - these figures are mentioned on the chart.

From a low of 47, the stock moved to 91 - a rise of 44 points. The Fibonacci retracements are - 38.2%/74(=91-44x0.382); 50%/69; 61.8%/64.

The 38.2% retracement corresponds to the 50 day EMA and the 61.8% retracement to the 200 day EMA.

So, the answer that I was looking for is that the maximum drop should be to the 200 day EMA - which would also ensure that the stock remains in a bull market.

Please remember that an index or stock behaves differently at a bull market top and at the top of an intermediate bull phase.

@Sumit: I agree that the stock is unlikely to drop to 50 any time soon. Please read the note to Eswar about where it can drop and why.

I've no idea if the stock will hit 160 in 2 years. That would mean a 2 year forward P/E of around 28, as per projected rate of growth. That would mean an earnings yield (E/P) of 3.6%, and a negative 'Margin of Safety'.

Eswar Santhosh said...

As an investor, I'd feel safer around 60 - 65 than at 160. I'd feel very happy at 50-55, which is why I searched for reasons to get that price :-)

If it trades at Rs. 160 within 2 years time, without earnings catching up with it, I'd say it would be in "bubble" territory or FMCG sector has been "re-rated", neither of which is great news. (Re-rated would be quickly De-rated on a downturn)

VJ said...

Stock has made new 52 week high and looks like settling....

You may have to revisit your analysis quickly on this one.

Subhankar said...

I wrote an update on May 26 which wasn't a bullish view either!

The stock has continued to rise and make new highs. Both fundamentally and technically, the stock is looking overbought.

If you hold this stock, maintain a trailing stop-loss and enjoy the ride. Part profit booking may be a good idea.