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Friday, June 8, 2012

Stock Chart Pattern - Bharat Bijlee (An Update)

Like most companies in the capital goods sector, Bharat Bijlee, a small-cap electrical transformer and motors manufacturer, has been facing turbulent times. It is a credit to the financial prudence of its management that the balance sheet hasn’t deteriorated too much. However, cracks are clearly visible.

Top line remained almost flat for year ending Mar ‘12 but profit at the operating and net level fell by 38% and 22% respectively, thanks mainly to a large increase in manufacturing costs. Cash flow from operations turned negative for the first time in 5 years. Consequently, debt/equity ratio almost doubled – though it remains well within manageable limits.

The bears have pulverized the stock, as will be evident from the one year daily bar chart pattern of Bharat Bijlee:

Bharat Bijlee_Jun0812

In the previous update more than a year back, a “hold with a strict stop-loss of 880” was recommended. The stock broke down decisively below 880 in Jul ‘11 and continued its downward trajectory till it found some support at 695 in Aug ‘11.

For the next two months, the stock price tried to cling on to the 695 level but failed. The downward journey resumed in Nov ‘11 and the stock finally formed a small ‘double-bottom’ reversal pattern at 511 in Dec ‘11. Such small reversal patterns deep within a bear market usually don’t reverse the trend.

The rally in the stock during Jan and Feb ‘12 coincided with the rally in the broader market, and the stock price managed to climb above all three EMAs to an intra-day high of 767 on Feb 17 ‘12 – an impressive 50% gain from its Dec ‘11 low. 

But the stock formed a ‘reversal day’ pattern, which marked an intermediate top. Note that three of the four technical indicators touched lower tops as the stock rose higher (marked by blue arrows). Negative divergences in three out of the four indicators warned of an end to the rally.

A huge volume surge on Apr 18 ‘12 couldn’t propel the stock price above the Feb 17 ‘12 high of 767, and the stock fell back in a bear market. At today’s closing price of 600.55, the stock is still 85% below its Jan ‘08 peak of 3950.

Is it a good idea to enter the stock now? Two of the technical indicators – RSI and ROC – are showing positive divergences by touching higher bottoms as the stock price dropped lower. But that isn’t clinching evidence of a turnaround. Though the ROC has crossed above its 10 day MA into positive territory, MACD is negative and both RSI and slow stochastic are still below their 50% levels.

The stock price needs to move above 767 (Feb ‘12 top) to form a bullish pattern of higher tops and higher bottoms. Even if it achieves that, it may have a tough time crossing the 880 level.

Bottomline? The stock chart pattern of Bharat Bijlee is in a bear market, and there is a possibility that the Dec ‘11 low of 511 will be tested and broken. Wait for a clear sign of trend reversal and check Q1 results next month before taking a decision to enter. The main problem with small-cap stocks is that they trade in small volumes which make entry/exit difficult. However, a revival in the power sector and lower commodity prices can change the fortunes of the company dramatically. A good stock to keep on your ‘watch list’.


Ajay said...

Is there further downside to the stock. Qutoing below book value. Dividend is reduced. Losses reported. ofcourse the entire sector is performing badly, this small cap is no exception... What should be done if holding it an average price of 700/- book losses and move on or should average more or sit tight and wait for sector to revive. The company is not a fake company like bartronics, mic electronics. Its there for long time and has a brand name for itself. Want to hear from you. As usual you were spot on to identify the downside in the stock in your post.

Subhankar said...

The 511 level was tested and broken as expected, and since then 511 has acted as a resistance.

There is no sign of a bottom formation yet. All rallies are being sold into. The power sector is in doldrums - so suppliers to the power sector are taking it on the chin.

Never average down, since you don't know how low the stock will fall. It is a good company in a lagging sector. You may be better off switching to FMCG/Pharma.