Technical updates – Gayatri Projects and IRB Infrastructure

With the economy showing signs of settling down after absorbing the double-whammy of demonetisation and GST implementation, focus of investors and analysts is shifting towards the neglected infrastructure sector once again.

Fortunes of shareholders of two companies from the construction sector - Gayatri Projects and IRB Infrastructure - have taken divergent paths. The stock of Gayatri Projects has gained 47% in the past two years, while the stock of IRB Infra has lost 7%.

On the financial front, Gayatri Projects has a debt/equity ratio of 2.22 and its financial expenses are 200% higher than its net profit. IRB Infra has a lower debt/equity ratio of 1.23 and its financial expenses are 50% higher than its net profit.

Gayatri Projects is trading at a P/E of 9.2. IRB Infra is trading at a four times higher P/E of 39.9. 

Gayatri Projects

The closing stock price of Gayatri Projects formed a 'triple bottom' reversal pattern below its three EMAs during Feb '16 and May '16. That triggered a price recovery that faced strong resistance from its Nov '15 top of 151.50.

A breakout with good volume support above 151.50 on Apr 17 '17 failed to sustain above the resistance level. Another breakout on Jun 5 '17 managed to keep the stock price above the resistance level, which was subsequently tested on Jul 5 '17 and Aug 10 '17 and turned into a support level.

The stock rose to touch a new high of 201.75 on Nov 16 '17 (note that the stock's face value was split from Rs 10 to Rs 2 in Feb '17). Daily technical indicators are looking bullish but showing negative divergences by failing to touch new highs with the stock's price.

Some correction or consolidation may occur. For the past two months, bulls are buying every dip, so corrections have been shallow.

IRB Infrastructure

The closing stock price chart of IRB Infrastructure has frustrated long-term investors but given plenty of opportunities to short-term traders. The chart shows three bearish phases and three bullish phases during the past two years.

Light blue ovals have marked every crossing of the 50 day EMA below (death cross) or above (golden cross) the 200 day EMA. The 200 day EMA itself has meandered sideways for the past two years - giving no advantage to bulls or bears.

Daily technical indicators are looking bearish after correcting overbought conditions. The stock price touched a higher bottom of 200.60 on Aug 10 '17, and may attempt to rise past its May 2 '17 top of 266.80.

(If you wish to enter either of these stocks, or any other stocks from the construction sector, you are on your own. The sector typically has high debt and uneven cash flows and profits.)

Technical updates – Gayatri Projects and IRB Infrastructure

Stocks from the construction sector have emerged from long bear phases in anticipation of growth in the economy that may lead to revival of stalled projects and awarding of new contracts. The ground reality hasn’t quite lived up to the expectations – though there are some signs of increasing construction activity.

Gayatri Projects and IRB Infrastructure are two companies from the construction sector that have similar looking chart patterns (below), but looks can deceive. While the former has gained a considerable 270% from its bear market low to its 2 years high, the latter has gained an even more impressive 365%.

On the valuations front, Gayatri has a debt/equity ratio of almost 2, and its financial expenses are three times more than its net profit. IRB’s debt/equity ratio is a more manageable 1.06 and its financial expenses are marginally less than its net profit. No wonder Gayatri is trading at a P/E of 9.4 while IRB is trading at a three times higher P/E of 29.3.

Does that make one a better buy than the other? Or, should both stocks be avoided? You tell me!

Gayatri Projects

The stock price of Gayatri Project went through a long ‘double bottom’ bear market reversal pattern formation that took 7 months to complete. The subsequent rally was sharp, and was supported by strong volumes that launched the stock into a bull market.

Such sharp rallies are difficult to sustain. All four technical indicators reached extremely overbought conditions that led to a correction and then a small ‘double top’ pattern with a higher second top. But none of the technical indicators touched a higher top. The combined negative divergences was followed by a sharp correction that bounced back before testing support from the rising 200 day EMA.

For the past 4 months, the stock price has been consolidation sideways within a triangle pattern from which the break out can occur in either direction. Technical indicators are in bearish zones, but the 200 day EMA is still rising and the stock is trading above it in a bull market.

IRB Infrastructure

The stock price of IRB Infra dropped to a bear market low of 54 on a sharp volume surge, which was a sign of selling exhaustion. A ‘V’ shaped recovery was followed by a drop to a higher bottom – forming a small ‘double bottom’ pattern that preceded a gradually rally.

The rally faced resistance from the 200 day EMA and dropped to a higher bottom that indicated the start of a bull phase. The next leg of the rally was sharp and accompanied by strong volumes. But overbought conditions and negative divergences (marked by blue arrows) in three of the four technical indicators led to a sideways consolidation within a ‘rectangle’ pattern.

The consolidation within the ‘rectangle’ has consumed more than 5 months. Since rectangles are usually continuation patterns, the eventual break out is likely to be upwards. But rectangles are unreliable patterns, so one needs to wait for the break out to initiate any buy/sell action. Technical indicators are in bearish zones. The consolidation is likely to continue for a while longer.

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:

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.

Stock Chart Pattern - Gayatri Projects Ltd (An Update)

My previous look at the stock chart pattern of Gayatri Projects was back in June '09 - almost 10 months ago. The stock had just completed a spectacular rise from a low near 40 to a high near 200 after 11 straight upper circuits!

The stock became hugely overbought - as is evident from the slow stochastic and RSI indicators - and entered a corrective phase that took it down below the 20 day EMA. From the technical indicators, I surmised a further correction down to the 140 level where possible support from the 50 day EMA was expected to kick in.

I have mentioned more than once that technical analysis is not a science. Similar chart patterns often do not produce similar outcomes. During bear phases, lower targets get penetrated further. In bull markets upper targets are often overshot.

During shorter time frames technical analysis becomes more of a 'hit and miss' affair, but on longer time frames it can turn out to be almost prophetic. A look at the one year bar chart pattern of Gayatri Projects will help clarify what I mean:-

At the bottom left corner of the chart, note the 11 straight upper circuit days and the subsequent correction below the 20 day EMA. Instead of continuing to correct down to the 50 day EMA, the stock again moved up to the 200 level, before dropping down to seek support from the 50 day EMA. End result? The stock fell to a low of 153 and not to 140.

Now, here comes the 'prophetic' part. This is what I wrote in my earlier blog post:

'Reaching the all-time high any time soon may be a tall order. After the correction runs its course, the stock may hit upside targets of Rs 225/250/320 before facing major resistance. That means a possible 50-100% rise from the current level.'

The closing rate on June 25 '09 was 164. If you had been brave (or lucky) to heed my advice and buy the stock, you would be sitting today on handsome profits exceeding 150%!

The first top, after the correction took support at the 50 day EMA, was at 289 in early Aug '09 - surpassing the first two upper targets. The next top was 317 a month later. A brief consolidation was followed by a rise to 394 in the third week of Oct '09.

The stock ultimately 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 Gayatri Projects stock has been in a sideways consolidation for the past three months, like several other stocks. Probably awaiting a trigger from Q4 results to decide which way to turn. The slow stochastic and RSI are indicating short-term weakness, though the MACD is positive and above the signal line.

Bottomline? The stock chart pattern of Gayatri Projects is in a 'pause' mode just below the 61.8% Fibonacci retracement level of the bear market fall. Existing investors can book partial profits. Fresh investments can be made after a correction, or after the stock clears the 486 level.

Stock Chart Pattern - Gayatri Projects Ltd

The stock chart pattern of Gayatri Projects Ltd has several interesting formations. But before I start discussing them, questions may arise. Why discuss Gayatri Projects? Why not IVRCL or Punj Lloyd?

Good questions. The short and simple answer? Cash flows from operations. Most of the construction and infrastructure companies generated more hype than cash. During the boom period between 2004 to 2008, IVRCL and Punj Lloyd had bloated order books but negative cash flows from operations.

Gayatri Projects created far less hype but not only booked good orders, they executed them and collected payments. It helped them to generate decent cash flows from operations. Taxes and dividends came out of this cash. The current downturn has dented their margins - but they are unlikely to go around with a begging bowl.

At the height of the bull market in Jan '08, this Rs 10 face value stock almost hit the Rs 700 mark. The dramatic drop all the way to Rs 40 in Mar '09 was way overdone. Let us look at the 6 months bar chart pattern of Gayatri Projects Ltd to see what happened:-

Making a 'V' shaped bottom, the stock quickly ran up past the Rs 90 mark and then entered a bullish saucer-shaped consolidation pattern. The breakout from the pattern was stunning. 11 straight upper circuits took the stock past the Rs 160 mark!

After almost hitting Rs 200 - a 5-bagger within the space of less than 3 months - the stock reversed from a strong resistance zone, and has entered a downward sloping channel. In spite of the sharp run-up, the stock has barely retraced 25% of the massive fall from the Jan '08 top.

During the ongoing correction, the volumes on up days have been much stronger than those on down days. The OBV indicator is reflecting this accumulation by smart investors.

The RSI has moved down sharply from heavily overbought territory and is about to enter the oversold zone. The MACD is still positive but below its signal line. Both are moving downwards.

The slow stochastic reacted from the overbought zone, corrected briefly around the 50% mark and has once again resumed its downward journey towards the oversold region.

Today's trade has taken the stock below the 20 day EMA. This is short-term bearish. The technical indicators are hinting at a further correction to the Rs 140 level where the 50 day EMA may provide support. A breach of the 50 day EMA could set the next target at Rs 120 - which would be a 50% retracement of the recent rise.

Reaching the all-time high any time soon may be a tall order. After the correction runs its course, the stock may hit upside targets of Rs 225/250/320 before facing major resistance. That means a possible 50-100% rise from the current level.

Bottomline? Existing holders of IVRCL or Punj Lloyd may think about switching to this hidden gem. The stock chart pattern of Gayatri projects is encouraging enough for even new investors to get their feet wet in the infrastructure sector. But please do not forget to maintain stop-losses.

PS You can read more about Gayatri Projects at Rajeev's blog.

Related post

How to Select Stocks within Infrastructure Sector