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Wednesday, February 2, 2011

Stock Chart Pattern - Gayatri Projects Ltd (An Update)

One of the comments made in the previous update of the stock chart pattern of Gayatri Projects in Apr ‘10 bears repetition because of the subsequent calamity that has befallen the stock:

‘The stock … made an intra-day top at 472 in Feb '10 - thereby correcting almost 66% of its huge 94% bear market fall from 696 (in Jan '08) to 42 (in Mar '09). Small and mid-cap stocks take a long time to recover from such massive falls - one of the inherent risks of investing in such stocks. Stupendous returns are often followed by soul-destroying collapses.’

The one year bar chart pattern of Gayatri Projects will reveal why that statement has relevance today:

Gayatri Proj_Feb0211

The stock moved up on strong volume support to touch a new high of 503 on May 18 ‘10 – a whopping 1100% gain from the Mar ‘09 low of 42, but only a 70% retracement of its entire bear market fall. It turned out to be a high volume ‘distribution day’. The stock opened with a gap up at 503, fell to 462 intra-day and closed at 485.

The subsequent correction dropped the stock to its 100 day EMA, a bounce up made a lower top, and the stock tested support from the 100 day EMA again. The next upward bounce ended with another ‘distribution day’ on Jun 14 ‘10. This time the stock drifted down to the 200 day EMA in end-Jul ‘10. For the next three months, the 200 day EMA propped up the stock price till it broke down below the long-term moving average in end-Oct ‘10.

After the ‘death cross’ of the 50 day EMA below the 200 day EMA in end-Nov ‘10, the next leg of the correction has been sharp and swift – pushing the stock into a bear market. Today (Feb 2 ‘11), the stock hit an intra-day low of 234 – a 53% correction from the May ‘10 peak, and a 58% retracement of the rally from the Mar ‘09 low. What happened? Why this sudden turnaround in fortunes?

The company has been booking a variety of orders – a road project in Nagaland, a civil construction project for NALCO, Orissa, an electrical substation project at Indore – and had an order book of Rs 8000 Crores at the end of Q2, when it declared a decent set of results.

The problem lies elsewhere. Negative cash flows from operation in the year ending Mar ‘10. Mounting debt with a Debt/Equity ratio of 2.2, which caused interest payments to double and exceed the net profit. An over-ambitious diversification into a power project in Nellore, AP as a joint venture with Nagarjuna Construction that will involve an investment of Rs 1000 Crore, which will be funded partly through a rights issue and the rest through more borrowings.

That means the balance sheet is going to further worsen. The market has not been kind to infrastructure companies – specially those with a lot of debt on its books. The technical indicators are looking quite bearish. The RSI and slow stochastic are both in their oversold zones. The MACD is negative, and below its signal line. The ROC is also negative, and below its 10 day MA. The only saving grace is the higher bottoms in the MACD and ROC, though these have not been supported by the RSI or slow stochastic. Any bounce up will just be another opportunity to sell.

Bottomline? The stock chart pattern of Gayatri Projects is an example of what technical analysts love to say: All the fundamentals are reflected in the price. I don’t necessarily agree with that point of view – but in this case, I’m making an exception. The stock can go much lower. Avoid.

1 comment:

Subhankar said...

Gayatri Projects has completed a rights issue of shares in Mar '12 in the ratio of 1:1 @Rs 120 per share to raise Rs 144 Crores. After the issue, promoter stake has increased from 55% to 63.5%.