Sensex, Nifty charts (Oct 09, 2020): 5 weeks long down trends reversed by FII buying

FIIs were net sellers of equity on Fri. Oct 9, but were net buyers during the first four trading days of the week. Their total net buying was worth Rs 33.7 Billion. DIIs were net buyers of equity on Thu. and Fri. (Oct 8 and 9), but were net sellers during the first three trading days. Their total net selling was worth Rs 23.89 Billion.

IHS Markit's India Services PMI rose to 49.8 in Sep '20 from 41.8 in Aug '20, but remained below the 50 mark - indicating contraction. The Composite (Mfg. + Serv.) PMI expanded for the first time in 6 months, rising from 46 in Aug '20 to 54.6 in Sep '20.

After its bi-monthly MPC meeting from Oct 7-9, '20 RBI decided to keep the repo and reverse repo rates unchanged at 4% and 3.35% respectively. RBI also forecast a GDP contraction of 9.5% for FY 2020-21.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows how a sudden gush of FII money has blown away technical resistances. Expectation of a second round of stimulus in the US may have turned FIIs into bulls.

The 5 weeks long down trend (marked by blue down trend line) has been reversed and strong resistance from the 335 points downward 'gap' formed on Feb 28 has been overcome. Bears had no place to hide. Their short-covering helped the week's sharp 1800 points rally. 

Daily technical indicators are looking bullish and overbought. MACD is rising above its signal line in bullish zone. ROC has climbed to the edge of its overbought zone. RSI is rising towards its overbought zone. Slow stochastic is well inside its overbought zone, and can trigger a pullback towards the 335 points downward 'gap' of Feb 28.

Q2 (Jul-Sep '20) corporate results have started hitting the market, with TCS releasing a decent set of numbers and announcing a share buyback. Wipro also announced a share buyback. 

Dividends exceeding Rs 5000 received by shareholders now attract a 7.5-10% tax. (Earlier, companies had to pay a dividend distribution tax.) Promoters holding large chunks of stock may prefer to opt for buybacks - which reduce equity capital and thereby enhance EPS.

If you are thinking about tendering shares to a company offering a buyback - think again. You may offer 500 shares, but the company may accept only 170. Also, buybacks attract capital gains tax - so you might as well sell in the market.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed above the 11900 level for the first time in more than 7 months - gaining nearly 500 points (4.3%) on a weekly closing basis.

The bearish pattern of 'lower tops, lower bottoms' formed during the past 5 weeks have been negated - thanks to FII buying. All three weekly EMAs are rising, and Nifty is trading above them in a long-term bull market.

Weekly technical indicators are in bullish zones and showing some upward momentum. MACD is rising above its signal line in overbought zone. RSI is rising above its 50% level. Slow stochastic is moving up towards its overbought zone after dropping down from it. Some more index upside is possible. 

Nifty's TTM P/E has moved up to 34.71, its highest level ever and well above its long-term average deep inside its overbought zone. The breadth indicator NSE TRIN (not shown) has dropped sharply from its oversold zone - and can limit near-term index upside.
 
Bottomline? Sensex and Nifty charts have reversed 5 weeks long down trends on the back of FII buying. Bulls are back in control. However, caution is advised as the broader market didn't participate during the week's rally. Check Q2 (Jul-Sep '20) corporate results before committing fresh money to individual stocks.

Why you need the resilience and discipline of a door-to-door salesman to succeed in the stock market

If you are thinking: "What on earth is a door-to-door salesman?" then you probably belong to a generation that has never seen 3D picture discs in a View-Master or listened to a 78 rpm vinyl record on a gramophone. In which case, you have obviously never met a door-to-door salesman. 

There was a time in the not-so-distant past, when many retail products - particularly encyclopedias - were sold by salesmen who knocked on the doors of homes to demonstrate and sell their wares.

Just like the buggy whip and the hurricane lantern have almost disappeared with the onslaught of industrial and technological progress, so has the profession of door-to-door selling.

A few years ago, Forbes magazine had listed '10 Top Dead or Dying Career Paths'. Telemarketing and door-to-door selling was 7th on the list - just ahead of photo film processing.

Before the advent of the Internet and social media, the only way smaller manufacturers or dealers could mass-market their products was through door-to-door selling. 

Salesmen were paid a token salary - or none at all - and made money through sales commissions only if they met their monthly or quarterly targets. Each salesman was allocated a specified locality or territory - where they had to compete with other salesmen selling similar or different products.

Home owners were bothered and irritated by their door bells being rung by salesmen at all odd hours trying to sell them anything from incense sticks and toothpaste to books and vacuum cleaners.

Most slammed the door shut on the faces of the salesmen. A few who were kind enough to listen to a salesman's pitch probably didn't buy, giving some excuse like "I just bought a similar product" or "I don't have enough cash with me."

In other words, making a sale itself was a difficult task. Meeting stiff monthly sales quotas was nearly impossible. Still, the salesmen would go on their rounds come rain or shine - knocking on doors and getting them slammed in their faces.

You can just imagine the kind of resilience and discipline that was required to carry on - despite knowing that the chances of success were negligible. But when they did make a sale, good salesmen ensured that they sold their higher-valued products so that they could earn more commission.

Being able to handle repeated disappointments and having the mental wherewithal to bounce back and keep trying is just the kind of discipline one requires for success in the stock market.

A successful salesman eventually developed a winning strategy after repeated failures. So should a stock investor. 

If you have tasted some success by buying a stock without doing much research and then selling it at a profit, you are unlikely to be able to repeat your success.

Even after doing proper study of a company's annual report and its stock price chart, the stock you pick may not give you the returns you expect. 

Eventually, the resilient and disciplined investors will learn from their mistakes (or follow the advice of an experienced investor) and learn to follow a plan and a strategy that enable them to select winning stocks.

And once they have picked a winner, they buy a lot of it and hold on for the long-term to reap the benefits of dividends, rights, bonuses and buybacks.

Stock Buybacks: A Good Thing or Not?

There are many ways in which a company rewards its shareholders. The most common methods are bonus issues, rights issues, dividends, stock splits and share buybacks.

Bonus issues increase the equity capital. The market price of equity shares gets adjusted according to the issue ratio. So, in theory, there is no gain for shareholders. The company can benefit because the higher capital enables them to borrow more. 

In reality, share price often rises following a bonus issue - particularly for established and financially strong companies - as the lower bonus-adjusted price attracts buyers.

Rights issues increase the equity capital, and sometimes also the reserves if the rights issue is offered at a premium to face value. If the issue price is lower than the market price, shareholders benefit through capital appreciation, even though the market price gets adjusted in the same ratio as the rights issue.

Dividends benefit shareholders, because it is tax-free cash in their hands. For companies, the cash outgo indicates that the company does have sufficient resources to pay dividends. 

If the company has to resort to debt in order to pay dividend (or tax), then it is a 'red flag'. This is why studying the Cash Flow statement in Annual Reports is so important. It gives a clear view of a company's cash position.

Stock splits do not increase the share capital of a company. The face value of equity shares get reduced and the number of shares increase proportionately. Again, in theory, there is no benefit for shareholders.

However, the increased number of shares in demat accounts usually leads to near-term selling. Eventually the selling subsides. The lower market price of the split shares attracts buyers, pushing up the market price. 

Here is an example of how bonus and splits can enhance value for long-term shareholders.

Back in 2002, ITC shares of Rs 10 face value were trading at around Rs 600 or so. If someone had bought 100 shares, his investment would be worth Rs 60000 - not a small sum 14 years ago. 

If s/he had the foresight to hold on till today, the holding would have increased to 3000 shares of Rs 1 face value - thanks to two bonus issues (1:2 and 1:1) and a stock split (10:1).

At the current (corrected) market price of Rs 300, the shareholding would be worth Rs 9 Lakhs - a 15-fold increase, not counting the substantial dividends paid each year.

Share buybacks - sometimes at a premium to market price - reduce the equity capital to the extent of number of shares bought back. The bought-back shares are extinguished. Shareholders get an exit opportunity at a profit.

In case they hold on, the market price tends to rise after the buyback (due to higher EPS and lower P/E) - providing capital appreciation.

Read more about pros and cons of share buybacks in this article.

Is OnMobile Global for sale?

A few weeks back, there was a rumour in the market that TCS was looking at the possibility of buying OnMobile Global. That remained a rumour and did not become news. Those who may have bought the stock on the basis of the rumour may be waiting for an opportunity to sell.

That opportunity may not be far away. As per a recent article in Business India magazine, OnMobile Global is on the block and the latest suitor is Idea Cellular (of the Aditya Birla group). Apparently, Idea is ready to buy a 60% stake in the company at a price of Rs 100 – which is 33% higher than today’s closing price of Rs 74.40.

If this rumour turns out to be true, then investors may be able to pocket a neat gain if they enter at the current market price. Acquisition of a 60% stake – or even a lower stake - will trigger an open offer to existing shareholders.

In a post on the telecom sector a couple of months back, it was observed that the OnMobile stock was trying to form a bottom by consolidating within a rectangular band between 54 and 73. It was suggested that the stock could be a contrarian bet, but with a strict stop-loss at 52.

In Jan ‘12, the stock crossed above the rectangular consolidation zone, rose to an intra-day top of 84 on Feb 15 ‘12 and briefly breached its falling 200 day EMA. It has now pulled back to the top of the rectangular band. An upward bounce can be used to add/enter.

What if the rumour about Idea‘s stake buy remains a rumour – like it happened in the case of TCS? The company is fundamentally strong, and its overseas businesses, which contribute nearly half of its total revenues, are supposedly doing well. Domestic business is under pressure. Q3 results showed 12% top line growth but a 11% dip in the bottom line.

With smart phones becoming cheaper by the day and 3G service roll-outs in progress, OnMobile’s expertise in value-added software services should see growing demand. Even if the stake sale doesn’t go through, it may be worth holding on to the stock. A buy-back by the management, with a ceiling at Rs 85, is currently in progress.

Why did Reliance announce a share buyback?

Regular readers of this blog know that I am biased against any company that has ‘Reliance’ in its name. So it should not come as a surprise that all actions by the Ambani brothers are viewed through a lens of strong suspicion by me.

If you are a dyed-in-the-wool Reliance investor, please don’t take umbrage at my tirade. Just ignore it. If you are considering an entry into this erstwhile darling of the Indian stock market, please read through and then decide.

The performance of Reliance companies have been less than stellar during the past couple of years. The stock market has punished all the group company stocks, including those of the big daddy of them all, RIL. The Ambani brothers have become wealthy beyond belief and have acquired notoriety by using various dubious means to circumvent the rules and accumulate the shares of their own companies. The hammering of Reliance group stock prices has dented their considerable personal wealth.

What better way to make a little extra cash than to announce a buyback before announcing Q3 results? RIL’s Q3 results – to be announced on Jan 20 ‘12 – is not expected to be great. That may lead to further selling of a stock that has already lost more than a third from its 2009 peak. The buyback announcement caused a price spurt – providing a nice opportunity to make a few extra bucks.

What will happen to small investors holding the stock? Not much – unless they use the current price spurt to book profits. Buybacks are a method used by companies ostensibly to ‘reward’ shareholders. How? Usually, the bought back shares are extinguished – which means they cease to exist. So, the equity capital of the company gets reduced and correspondingly, the EPS increases. The P/E ratio becomes lower, making the stock look more attractive valuation-wise.

But it all depends on how much of the equity capital gets bought back and extinguished. A similar buyback was announced six years back, but only a small percentage of the total equity capital was bought back. If it is a tiny percentage this time as well, it will have little or no effect on the EPS or P/E. RIL is likely to buy the shares from the open market – which means small investors will get no particular benefit.

A share buyback can be an indication that the management thinks that the shares are undervalued. It can also mean that the company is bereft of ideas about what to do with their money to enhance growth. More likely the latter, based on the totally unrelated ‘di’worse’ifications that the elder Ambani has undertaken of late – into sectors like retail, telecom, media.

Make no mistakes. The refinery business has been – and continues to be - a cash cow. But refinery margins are coming down and the gas business has been mired in controversies. None of the unrelated businesses have performed well so far. Technically, the chart looks weak and the stock price can fall to its 2009 low.

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