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Wednesday, November 16, 2011

Stock Chart Pattern: Akzo Nobel (ICI) India – An Update

During my previous technical update of the stock chart pattern of Akzo Nobel (ICI) India more than a year back, the stock had corrected down to 845 after touching an all-time high of 970 in Sep ‘10. The technical indicators were looking oversold while the OBV indicated accumulation. That led me to surmise that the next up move could touch the 4-digit mark. I had also suggested that any drop below 845 could be used to enter with a stop-loss at 750.

It is time to have a look at the two years bar chart pattern of Akzo Nobel and see what kind of returns the stock has provided:

ICI_Nov1611

The stock did eventually rise to a new all-time high of 1045 in Jul ‘11, but not before inflicting pain on investors. Such are the hazards of relying on technical analysis – chart patterns don’t always play out as per expectations.

Note that the 750 level provided good support during Nov ‘10. It was briefly penetrated in Dec ‘10, before the stock price bounced up nicely. Through most of Jan ‘11, the stock managed to stay above the 750 level. But once the support was broken, the stock fell quickly to a low of 680 – a 30% correction from the top of 970 that briefly pushed the stock into a bear phase. The 680 level coincided with the top of Jan ‘10 – an example of how a previous top can often act as a support.

The bear domination didn’t last long. Within 5 weeks of touching the low of 680 in Feb ‘11, the stock broke out above the 750 level on a sharp volume spike, and proceeded to rally to an all-time high over the next 4 months.

Couple of interesting points to note here. When the stock price dropped to its 52 week low of 680 in Feb ‘11, all four technical indicators touched higher bottoms (marked by short blue arrows). The combined positive divergences gave advance notice that the bear phase won’t last long. Again, during the four months long rally to the all-time high of 1045 in Jul ‘11, all four technical indicators reached lower tops (marked by long blue arrows). The combined negative divergences warned that the bull rally was over.

Technical analysts often claim that the fundamentals are ‘in the price’. In this case, they would have been correct. Q2 ‘12 results announced last month showed good top line growth but a sharp drop in profits at the gross and net levels, thanks to the rise in raw material costs. The stock price dropped vertically below the 200 day EMA post the results announcement to the support of the blue up-trend line, but the stock had already corrected more than 10% from its peak prior to the results.

The 200 day EMA is providing resistance to the efforts of the bulls to take the stock price back into a bull market. The falling 50 day EMA is still above the long-term moving average, but a cross below the 200 day EMA (‘death cross’) may push the stock price down to the support zone between 680 – 750.

The technical indicators are giving mixed signals. The MACD is above the signal line, but inside negative territory. The ROC is falling sharply towards its negative zone. Both the RSI and the slow stochastic are above their 50% levels. Bounce ups on good volumes from the up-trend line, the 750 level or the 680 level may be good entry points.

Bottomline? The stock chart pattern of Akzo India (ICI) Ltd is an example of why small investors should look at fundamentally strong companies with solid balance sheets and trustworthy managements. While the Akzo stock has provided zero returns (not counting dividend of Rs 18 per share) in the past 12 months, it has given nearly 50% returns over the past two years. Compare that with the Sensex, which has provided negative returns in the past 12 months and zero returns in the past two years.

9 comments:

Ganpat said...

Dear Subhankarji,
Would you kindly look in to the chart of HDIL and offer your views.This stock is falling non stop since Oct 2010 and has shed more than 75% already.Its very scary
Thanks and regards,

Piyush said...

need a quick view here???
BRFL has a buyback program announced to acquire 28420000(20%) fully paid equity shares@300+ interest of Rs.2.06(@10% p.a)....Should one tender his shares????

Subhankar said...

@Ganpat: HDIL touched a peak of 411 in Oct '09 and has fallen more than 80% in 2 years. It is likely to test and break its Mar '09 low of 62.50, and can fall much further. You should have been scared a lot earlier!

@Piyush: Please remember the following: (1) Tendering shares to the company does not attract STT, so you will be liable to pay capital gains tax; (2) The company may not acquire the entire lot of shares you tender - or even any shares - if their 20% quota gets filled. The buyback process may take a couple of months after which you may get a cheque on which you will need to pay tax plus the shares that they have not acquired.

Unless the difference between the market price and buyback price is very attractive, it is better to sell the shares in the market.

rapidriser said...

Subhankar

Looks like you missed the announcement by Akzo Nobel India that they were merging 3 of their subsidiaries with themselves and paying almost Rs.1,100 crores at the ridiculously high P/E of 40+ on their FY-2011 profits. The sharp drop after the announcement of results was not because of the poor results, but due to the corporate equivalent of highway robbery committed by the management. In my opinion, a retail investor should sell this stock and stay away, irrespective of the technical and/or fundamental factors.

Subhankar said...

The proposed amalgamation has to be approved by statutory authorities before it can be implemented. If the authorities feel that the swap ratio is unwarranted, they will not approve the amalgamation.

'Issuing 1.11 Crores shares' is not the same as 'paying Rs 1100 Crores' because no cash is involved in the transaction. The amalgamated companies' shareholders (a.k.a Akzo Nobel BV) will receive the shares in exchange for the three companies.

The math goes like this: Post amalgamation, the overseas promoters holdings will go up by ~10% to 67%. Akzo Nobel India's top-line will increase by ~50% and bottom-line by ~14% giving an EPS of 40 and P/E of 20.5 (based on Mar '11 results and CMP). The equity capital will go up to Rs 50 Crores.

If you think that this transaction is equivalent to 'highway robbery', you should definitely sell your holdings.

rapidriser said...

After the announcement, I have already sold my holding which was a substantial percent of my portfolio.

Unfortunately, I do not share your faith that the Indian authorities will necessarily act with the interest of the minority shareholder in mind.

Ganpat said...

Dear Subhankarji,

Many thanks for your sharing your views.I have started buying from 65 only (trying to catch the falling knife,if I am permitted to use the market jargon LOL)and still scary!!
The most intriguing part is what one saw at 300 and what not at 60 in this scrip.??

Best regards,

Subhankar said...

@rapidriser: You have acted according to your convictions, which is commendable.

@Ganpat: Next time you want to kill yourself, at least choose a better knife - may be with an ivory handle with 'TISCO' or 'Hindalco' engraved on it! ;-)

More seriously, a mid or small-cap stock that loses 75-80% from its peak may take years to recover.

Subhankar said...

A group of minority shareholders of AkzoNobel, including Asian Paints, have objected to the proposal under which Akzo Nobel India will absorb three unlisted group companies, thereby increasing foreign promoter's share holding. Institutional investors such as ICICI Prudential, LIC, SBI Mutual Fund, Bajaj Allianz, among others, have informed Akzo Nobel,
(formerly ICI) about their discomfort.