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Wednesday, April 13, 2011

Stock Chart Pattern - OnMobile Global (An Update)

The previous update of the chart pattern of OnMobile Global generated a fair amount of reader queries and comments, which implies that the stock finds a place in the portfolios of many small investors. Some bought at the IPO price of 440 during the previous bull market. Others entered at various lower levels, but have not really got much returns from the stock.

What is the reason for investor fascination with OnMobile? Is it because the company is in the high-tech field of telecomm software, and investors assumed that growth in telecomm subscribers would automatically lead to growth in the telecomm software field? Or, is it because one of the promoters is an ex-Infosys employee, and OnMobile was going to be the ‘next Infosys’?

The disappointing performance of the OnMobile stock has left many small investors bewildered. However, the company is backed by a strong balance sheet – unlike Bartronics or Cranes Software, which were also favourites of small investors. So, the likelihood of the company providing decent returns in the future is high. The overseas rollouts of the company’s software services (for Vodafone and Telefonica) have commenced. These should boost revenues and profitability.

But investors must appreciate that growth in telecomm subscribers does not necessarily translate into higher profits for telecomm software providers. The company  provides discretionary value-added services, which users may not opt for. And, the ‘next Infosys’ is a myth.

What does the 2 years bar chart pattern of OnMobile Global tell us?

OnMobile_Apr1311

The stock has been in a down trend since touching a high of 682 back in Jul ‘09. A bear market was confirmed by the ‘death cross’ (marked by blue oval) of the 50 day EMA below the 200 day EMA in Nov ‘09. A bearish pattern of lower tops and lower bottoms continues. As per Dow Theory, the down trend remains in force till it is reversed.

Note that brief moves above the falling 200 day EMA in Jan ‘10, Sep-Oct ‘10 and earlier this month were met with selling. This is typical of bear markets where one is supposed to ‘sell the rises’. The rally from the Feb ‘11 low of 181 found resistance at the long-term support/resistance level of 310 and has dropped quickly to the next support/resistance level of 255.

The announcement of the 1:1 bonus issue on Mar 7 ‘11 (record date still to be decided) has not helped the bulls to loosen the bear hug on the stock so far. Is there a possibility of a trend reversal any time soon? The positive divergences in the technical indicators seem to suggest as much. All four reached higher tops while the stock made a lower top (marked by blue arrows). The stock may also be in the process of forming an inverse head-and-shoulders reversal pattern – with the left shoulder at the Nov ‘10 low of 226; the head at the Feb ‘11 low of 181; the right shoulder is still being formed; and the neckline at the 310 level.

Announcement of the record date for the bonus issue and good Q4 results can be the catalysts for the stock to reverse the down trend. Till then, one can expect the stock to consolidate between 255-310. The near-term technical indications are weak. The MACD is positive and just above its signal line, but has reversed direction. The ROC is also positive, but has dropped below its 10 day MA. The RSI has dropped from its overbought region, but is above the 50% level. The slow stochastic touched its overbought zone, only to fall below its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is showing signs of reversing the down trend. Good volume support on up days is an indication that the bad days may be getting over. A high volume break out above 310 will be the first confirmation of a trend change, and a buying opportunity. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.

5 comments:

tanish said...

Hi Subhankar - your update analysis on OnMobile is brilliant. This stock has indeed disappointed investors in the last 3 years. Can you please help clarify:

You said - The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.
Question 1: Can you please indicate on which price levels were this to take place?

Question 2: If OnMobiles does goes in a bull market - what would be the price targets it can achieve?

Subhankar said...

Appreciate your comments, tanish.

If the stock can convincingly break out above 310, it can reach 350 quickly. Along the way, one can expect the 'golden cross'. Beyond 350, the next target is 400. Both those levels are long-term support/resistance levels.

The target for the inverted head-and-shoulder pattern (if it does form as expected) is about 430.

Subhankar said...

The OnMobile stock is quoting ex 1:1 bonus from May 3 '11. All price levels mentioned in the chart and the post should be divided by 2 to adjust for the bonus.

fubared said...

My friend I am lost and ruined in OnMobile holding a good quantity at 130.

I know there is no else to blame but ME myself, as were enough warning indicators earlier - Infosys exiting, promoter pledging to buy more, key people like the CFO selling his ESOPs, the deep cut it took earlier this year, etc. Somehow I had faith that the company would deliver on the international front.

The recent TRAI directive on VAS activation seemed liked the final nail and the share price is down by 70% for this year. The weak Q1 didn't helped either. However illogical TRAI's directive seems (note they postponed SMS and marketing call regulation indefinitely), the punters are having a field day shorting OnMobile to Timbuktoo.

I have spends the last few weeks pouring my heart out and reading, reading and trying to decipher the Balance Sheet. OnMobile networth (share capital + reservers) = 845 crores. Debt is 88 crores. Cash is about 170 crores + their remaining 18% stake in VerSe is valued at about 40 crores in cash = 210 crores net cash (all this is in local domestic banks). The domestic revenues will be affected but international revenues will pick up from Q2. The sales for this year will be roughly about 550-650 crores.

OnMobile is backed by good pedigree investors. Argo Capital which invested about $12 million in 2000 for a 28% stake is looking for a exit. Consider a fixed 5% compound return in a Swiss bank, this stake would be worth a minimum $25 million in 2012. This means at a base value OnMobile is worth around $100 million. As a VC, Argo would be ruing itself if OnMobile falls to 40 Rs, which would roughly value OnMobile at $100 million. Their money would have been safer in a bank!

If I were a Argo I would try for a minimum $50 million for my stake to a big investor (eg. Tech Mahindra - specialist in buying semi-dead companies) i.e. value OnMobile at 800 crores.

My question to you my friend is WHERE DOES THE F..KING PAIN STOP. The usually perky and active promoter Arvind Rao is unusually quiet and has been hibernating. Does OnMobile falls to 35-40 or even LOWER? Is there light at the end of the tunnel or am I ruined.

Subhankar said...

I can appreciate your pain, but can't hold out much hope. The chart looks awful, and the stock can fall further.

OnMobile is caught between a rock and a hard place. Growth is slowing down in Domestic business, which generates nearly three-quarters of revenues. Overseas business has not yet picked up enough, but the company has already spent a lot of money to expand its overseas operations. Classic growth problems.

Even Infosys went through problems in the initial growth phase, and nearly went under - and no one wanted to touch its shares! (I'm not saying OnMobile is another Infosys.) No wonder Warren Buffett avoids tech stocks.

This is precisely the reason why one should maintain a stop-loss, so that a big loss can be avoided.

Here is the link to an interview of Arvind Rao published in Jun '11:
http://www.business-standard.com/india/news/qa-arvind-rao-ceo-onmobile-global/437998/