Wednesday, September 30, 2009

Stock Chart Pattern - 3i Infotech Ltd

The stock chart pattern of 3i Infotech Ltd looks a little different from other stocks that have been analysed recently. It made a high of 165 back in May '07 (actually 330, but adjusted for the subsequent 1:1 bonus). The bears attacked almost immediately, and the stock gradually slid down to 115 in Sep '08, before it fell off a cliff.

It finally bottomed at 25 in Mar '09 - dropping 85% from its peak. A swift 3 months rally took the stock to 95 in Jun '09 - an exact 50% Fibonacci retracement of the entire Rs 140 fall over 2 years. Thereafter, the stock has been in a consolidation phase within an 'ascending triangle'.

Let us have a look at the 1 year bar chart pattern of 3i Infotech Ltd:-

3i Infotech_Sep3009 

The RSI has moved above the 50% level. The MACD is positive, but marginally below the signal line. The slow stochastic is below the 50% level but the %K line has just crossed above the %D. All three are indicating mild bullishness. The OBV is providing the real clue to the underlying strength - the gradual rise indicates 'accumulation'.

3i Infotech is part-owned (39.5%) by ICICI Bank, and its revenues are a 50-50 split between software products and services. Its product portfolio - mainly targeted at banks and financial institutions - helps to generate a high net margin of close to 30%.

A low P/E of 6.25 means an earnings yield (E/P) of 16% - which is double the current fixed deposit rates in banks, leaving a good 'margin of safety'. Solid top and bottom line growth and strong cash flows from operations make this an ideal portfolio candidate.

Then why is the stock under-performing the Sensex (which has already retraced 70% of its bear market fall)? The company has been aggressively pursuing growth through the inorganic route. That means, it has been acquiring a number of software companies and businesses in India and overseas.

The danger of such a strategy - when leveraged through debt - is that the interest payments become due sooner than later, whether there is a global economic downturn or not.

3i Infotech is less reliant on clients in US and Europe (where the financial services outsourcing business has been hit the hardest) than most Indian software services companies. But the bears have mauled it just the same. And there lies an opportunity for smart investors.

Bottomline? The stock chart pattern of 3i Infotech is indicating that the smart money has been accumulating the stock, and an upward break from the ascending triangle may be imminent. Enter, or add more, on a close above 95. Keep a stop-loss at 70.

(Some questions: Why is the stop-loss set at 70? If you enter now, should you set a tighter stop-loss? At what price?)


Bharath said...

Thanks for the analysis..!!

scorpio said...

Stop of 70 is the 200 day EMA - learnt this from you :)
If i buy now - would keep a stop of 79, though not very tight, but it was todays low and last seen on August 20th. I would be interested in knowing your stock screen - do you see Subex in that ? Cos a friend of mine also recomends stocks which I see here :) unless he is also reading this same blog.

Subhankar said...

You're welcome, Bharath.

Why don't you take a shot at answering the questions?

Brawny M said...

Congratulations Sir,

You had mentioned about the breakout and here we see it today. Almost 15% high.

Super Analysis and timing.

Brawny M

Unknown said...

This is ONE "a no-nonsense" blog. Each and every article is to the very point with solid basis and simply used terminology. I believe since the breakout has happened in 3i Info, it's time to enter this stock with short as well as long term view.

Keep-up the good work, SubhankarDa.

Sumanta said...

Answering your question:
As scorpio has suggested the two lows in the ascending triangle formation had support at 200 day EMA of around 70, so that could be the one of the stop loss points. However based on the current price of 88, a stop loss of 70 would be around 22% which could be on the higher side for conservative investors. A stricter stop loss could be a little below 50 day EMA which would be around 78. Not sure if this analysis is correct.

Thanks for the analysis.


Subhankar said...

@scorpio: Good observation, Ashish. The other reason is that the lower trend line connecting the bottoms of the ascending triangle is also at 70.

Don't like loss making companies - so no interest in Subex.

@BM: Thanks. Some times technical analysis works like magic. But, like astrology, it should not be relied upon as a science.

@NK: Appreciate your comments, Narinder. You can make a small investment now, but don't bet the barn. The market is ripe for a correction. Plus Q2 results are round the corner.

@Sumanta: Good observations. Also look at the lower trend line of the ascending triangle as a support. If you want to really play safe, then use 95 as a stop-loss - since resistances, when broken, turn into supports.

Avinash Upadhyay said...

Subhankar: Thanks for taking up my request. I have reposed my faith in this stock for a very long time now since it is not predominantly a software solutions company like most other indian companies. It has a very healthy software products division. Secondly, I think it will earn well through the e-governance initiative where it is one of the major companies. Also, its recent tie up with sbi to open bank-kiosks in rural areas should serve it well. To cut the story short, I like its innovations and I have place my money always on innovators (Praj was one where i did well; Thermax is another and blue star and marico are yet others).

I hold a chunk in 3i and most of it is free - I had sold half my holding after the bonus after having bought the initial lot at a very low price.

Your blog - now this is one blog that I read to the exclusion of most others because this is not borrowed, is down to earth and makes complete sense.

I took your advice on Bartronics and sold the whole lot that I had bought!

Subhankar said...

Appreciate your comments, Avinash.

That's a great move you've made in 3i. Now just use trailing stops and enjoy the ride. The service initiatives in India are a big positive. The debt overhang is the only concern.

Hope you don't regret selling off Bartronics - should it start shooting up!

Unknown said...

Sir, you have mentioned the dividend yeild as 16%. I verified it. The dividend pay-out was Rs. 19.61 crores distributed over 13.07 crore shares. It works out to Rs.1.50 per share. At the CMP of 84.65 (25Jan2010) (PE 4.6), the dividend yeild works out to 1.77%. Your observations please.

Subhankar said...

I have mentioned 16% as the 'earnings yield' (which is inverse of the P/E ratio); it can be used in 'Margin of Safety' calculation by comparing it with the bank fixed deposit rates.

A company will have an 'earnings yield' if it makes a profit. It may or may not pay a dividend.

sanjeev said...

what is the likely price band in the next 3-4 months based on the technical analysis of this stock?

Subhankar said...

The stock has entered a bear phase after making a lower top in Jan '10. Down side targets are 71 and then 60.

ICICI Bank is planning to further reduce its stake. Q4 results may decide the trend.

vk said...

I see this coming close to support, suggested by you. what could be the further strategy for this stock. Considering the sentiment stcok may break the support.

Subhankar said...

Please read my previous comment.

The stock has bounced up a bit after hitting the first lower target at 71. A break below can take it down to 60.

The stock has been in a bearish phase since hitting 103 in Oct '09. I would use any up moves to reduce holdings. Sell on a break below 69.

vk said...

Dear Subhankar
The 3i infotech is looks to touch rs.60 soon. it may touvh intraday and bouce back..could it be the sign to buy...

Subhankar said...

The down move hasn't played out yet. The stock has promised more but delivered little.

Buying should be considered only on a break above 75. But I would avoid this stock till they clean up their balance sheet.