Modi effect on stock market – a guest post

After all the debate, discussion and anticipation, the Modi government has been sworn in and the council of ministers announced. The suspense of what will happen and who will get which ministry is over. Now it is time for getting down to business.

The first salvos have been fired by the PM – by first inviting heads of SAARC governments to the swearing-in ceremony and holding one-on-one discussions with them about bilateral issues and then, by setting up a SIT for unearthing black money in the economy. The first was an unexpected courtesy to our neighbours. The second is typical no-nonsense ‘walking the talk’.

What will Modi’s effect be on the stock market? In this month’s guest post, Nishit takes a look at the sectors that are likely to lead the next up moves in the stock indices if Modi continues to deliver on his poll promises.

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My previous month’s guest post began this way: “The market is going up as if there is no ceiling. Every day one sees their portfolios increase in value and everyone seems to be getting swept up by the Modi wave. Now, let us try and see what can derail this rally.”

Now, Modi has won the elections with a huge mandate. What next?

The first 6 months to 1 year are the honeymoon period for any Government. This is the period when they are given a degree of latitude. This is the time when the markets have hope in the new Government.

The new Government has promised jobs, growth and progress. How will they do this?

Firstly, they have to tackle the infrastructure mess by clearing road projects and making coal available to the power plants. Stocks of Infrastructure and power companies would start moving once these road blocks are cleared.

Next, finance has to be provided for these projects. Banking and infrastructure lenders will be the next to move up. As provider of materials for infrastructure to be built, steel and cement companies will be the next ones to rise.

In the midst of all this, IT and Pharma stocks, which are seen as defensives and export oriented, will lag behind. This is because the rupee has strengthened which may lead to their profits being curtailed.

PSU stocks should be another category which needs to be watched closely. Gujarat government stocks have done well under Modi.

Also, company stocks of a few industrialists perceived to be close to Modi, like the Adanis and the Ambanis, need to be closely watched.

These are interesting times we live in. For the first 6 months and especially during the time till the Union Budget in mid-July, the markets may rise on hope. After Diwali, emphasis will shift to the performance and results delivered by the new Government.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Stock Chart Pattern - JK Lakshmi Cement (An Update)

My previous analysis of the stock chart pattern of JK Lakshmi Cement was back in July '09. In Dec '09, the stock was split in a 1:2 ratio. So price levels discussed earlier needs to be divided by 2 for comparison with the current chart.

The stock chart had made a nice rounding bottom bullish pattern and gained an impressive 230% in 3 months from a low of 17.50 (then 35) in Mar '09 to 58 (then 116) in Jun '09. The stock was in the midst of a sideways consolidation, with contradictory signals emanating from the technical indicators.

The cement sector is not my favourite - a typical cyclical commodity sector with too many players, leading to low margins. What I liked about JK Lakshmi Cement was its strong balance sheet and commitment towards cost reduction through backward integration. I had suggested that investors could buy the stock on a break-out above 58 (then 116).

Let us take a look at the 1 year bar chart pattern of JK Lakshmi Cement to find out how the stock has fared in the last 10 months:

The sideways consolidation in Jun-Jul '09 lasted about 6 weeks followed by a high volume break-out that took the stock to 64. Thereafter, the stock consolidated sideways again, with the 64 level providing good support. Occasional upward spikes on high volumes gradually took the stock higher till it hit 74 on Oct 1 '09.

A three months long consolidation followed, during which the stock fell below the 64 level. That became a resistance level for a month, till the stock moved up again. Following the stock split, there was a sharp up move on good volumes and the stock hit a high of 85 on Jan 19 '10 before running out of breath.

Note that the initial sharp gain of 230% (17.50 to 58) took only 3 months. The next leg, from 58 to 85 - a gain of 46.5% - took 7 months. Overall, the stock gained 385% from its Mar '09 low -  outperforming the Sensex by a big margin.

The correction from Jan '10 coincided with the overall Sensex correction, but as is often the case with small-cap stocks, it started to underperform the Sensex on the way down. After dropping quickly to 63, it bounced up again but failed to test the previous top.

A sideways consolidation on diminishing volumes continued for 3 months. The stock eventually broke down below the consolidation zone and is now desperately seeking support from the long-term support-resistance level of 64.

The chart pattern shows several notable examples of technical analysis theory. The first one concerns break-outs and break-downs from consolidation zones. Break-outs require high volume support. Break-downs do not.

Next, a consolidation pattern is usually a continuation pattern. That means the trend before entering the consolidation pattern continues. From Jun '09 till Dec '09, all the consolidation patterns ended with an upward break-out on good volumes.

The trend before the consolidation pattern from Feb-Apr '10 was sharply downwards. The break-down from the pattern was therefore logical.

Third, and this is important for investors, bull phases tend to last a lot longer than bear phases. Note that the time taken for the stock to move up from 64 to 85 was almost 6 months (Jul 21 '09 to Jan 19 '10). All the gains got wiped out in the drop from 85 to 63 in just 8 trading sessions.

Such a sharp correction is usually followed by an equally sharp pullback, that provides a good selling opportunity. Very few investors can pick the exact tops or bottoms.

All the technical indicators have turned extremely bearish. The MACD is falling in negative territory. Both the RSI and slow stochastic are deep inside their oversold zones. The stock is below its 200 day EMA (currently at 67 - not shown in chart).

Bottomline? The stock chart pattern of JK Lakshmi Cement shows that all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.

Stock Chart Pattern - JK Lakshmi Cement

The stock chart pattern of JK Lakshmi Cement shows that it is one of those resilient stocks that are not too bothered by the gyrations of the BSE Sensex index.

The cement sector has not been a great favourite of mine. The large investments needed for expansion, frequent swings between shortages and over-supply, too many units of various sizes, regional market domination by different players, had all contributed to low margins for this cyclical sector.

The national highway project caused a sea change in the prospects of the cement industry. Coupled with the growth of the infrastructure and construction sectors led to a boom period for the industry. From a loss-making company at the beginning of this decade, JK Lakshmi Cement has turned around to become one of the smaller but stronger players.

What I like most about the company is its continuous efforts at cost reduction by building a captive power plant, a waste heat recovery system, and switching between different fuel inputs that increased profitability and generated a ton of positive cash flow from operations.

More details about the company can be found from this article. An analysis of the one year bar chart patter of the JK Lakshmi Cement stock follows:-

The stock made a rounding bottom pattern before starting its rally a little ahead of the Sensex. From a low of 35 on Mar 3, '09 it hit a high of 116 on Jun 3, '09 - a rise of 230% in 3 months.

The BSE Sensex index made a huge upward gap on May 18, '09 and then went on to form a head-and-shoulders pattern. No such gap is there in the chart above, because the stock had already moved up on high volumes on May 14 and may 15, '09.

After hitting the Jun '09 high, the stock has entered a sideways consolidation between the levels of 95 and 116, with good support from the 20 day EMA, and correcting only 26% of the up move. The Sensex corrected 31.5% of its rise from 8047 to 15600.

The RSI and slow stochastic have both moved above the 50% levels. In the process, they have made higher bottoms while the stock remained flat. This positive divergence may lead to a further up move. The OBV is tracking the stock with a slight upward bias. But the MACD is below its signal line and moving down - a negative divergence.

Contradicting signals from technical indicators are not unusual when the stock chart pattern is consolidating. A breakout can go either way. This is what makes technical analysis so exasperating some times!

Bottomline? The stock chart pattern of JK Lakshmi Cement makes it a good candidate for investment. Wait for a breakout above 116 to add. On a break down below 95, await the down move to play out before entering.

Stock Market News, Financial News - Feb 23, 2009

Infosys eyes two European firms

MUMBAI (Reuters) - Infosys Technologies is eyeing European software firms BCC and Ciber Novasoft among others as potential acquisitions, the Economic Times said on Monday citing two people familiar with the development.

The paper said a final transaction could be some time away, quoting one source as saying there was no agreement yet on the valuations of the two firms.

Poland-based BCC, which has annual revenues of $180-200 million, could cost more than $300 million, the paper quoted a source as saying. Ciber had an annual revenue of almost $75 million, the paper said.

Officials at Infosys could not be reached for comment immediately.

Both BCC and Ciber provide services to companies using products of German business software maker SAP.

Lasy year, Infosys bid for British consultancy and SAP services provider Axon but lost to smaller Indian rival HCL Technologies.

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Cabinet to take a call on DoCoMo plan to pick 20% in Tata Tele unit

By Priyadarshi Siddhanta, Indian Express Finance

THE Union Cabinet is likely to consider Tokyo-based telecom giant NTT DoCoMo's proposal to acquire 20.25 per cent in domestic telecom major Tata Teleservices Maharashtra (TTML), a subsidiary of Tata Teleservices Ltd (TTSL) in its meeting this week.

NTT DoCoMo had already made an open offer to the Tata Group company's shareholders in November last year to acquire a 20 per cent stake (384,241,919 equity shares) in the listed entity. The announcement came shortly after it acquired a 26 per cent in TTSL for Rs 13,070 crore. If fully subscribed, the offer (to acquire stake in TTML) will cost the Japanese firm more than Rs 800 crores. The closing date of the offer is now March 12, as against January 8 this year. The offer price is understood to have been fixed at Rs 24.70 a share.

But in December, DoCoMo deferred the offer after a delay in approval from Sebi, which is believed to have said that since both firms are operating in India and engaged in the same vertical, valuation for indirect acquisition should be the same as direct acquisition. Under Sebi acquisition rules, it is mandatory for DoCoMo to make an offer for an additional 20 per cent in any Indian listed company after it acquires a substantial stake in the target company.

"Cabinet is expected to discuss the issue at length and take a view on the matter in its meeting," a source said.

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DLF, Unitech books sketchy on subsidiaries

By Sunny Verma, Indian Express Finance

Audit trails of subsidiaries of India's two largest listed real estate companies are running dry. Annual reports of DLF shows the accounts of its subsidiary, Silverlink Holdings Ltd, acquired in January 2008 and having total assets of Rs 2,291.12 crore, have not been comprehensively audited despite the listing requirements of the stock exchanges.

Similarly, the annual report of Unitech Ltd show that the financial statements of many of its subsidiaries and joint ventures, with total assets of Rs 541.39 crore, were not audited as on March 31, 2008. (More ...)

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Cement dealers continue to face shortage

By Smita Joshi Saha, Indian Express Finance

Cement dealers in Mumbai continue to face shortage in supply of cement as producers seem to have shifted supplies for the infrastructure projects elsewhere in the country. Dealers now find it difficult to deliver the commodity for various residential and commercial projects within the metro on time.

A Mumbai-based dealer on condition of anonymity said, "Our delivery period has gone up to about 7-8 days from 1-2 days earlier, due to this short supply."

According to industry players, reasons for the short supply are insufficient railway rakes for transport and a sudden spurt in demand from the infrastructure sector. (More ...)

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Tea sector to prosper in recession, say experts

By Rajesh Ravi, Indian Express Finance

What do the people do in times of recession? Well, it seems that they sit more at home and drink tea, and drink more tea by shifting from Cola, Beer and Vodka, say commodity experts. And the penchant for tea in times of uncertainty and recessionary blues helps the tea industry. Perhaps, it may be the only sector and industry smiling and flourishing, while other markets shrink and crawl. Experts estimate it to grow handsomely in the years to come as people turn more health conscious.

In the US market, tea's appeal is immense and vibrant according to Joseph P Simrany of the Tea Association of USA. Import of tea into the US market is seen growing with green tea, in particular, growing by almost 200% in a decade. The total market has grown from $1.84 billion in 1990 to $7.3 billion in 2008. It is estimated to double in the next five years, Simrany said. (More ...)

Five more things to avoid in a Bear Market

A lot of investors who joined the party from 2004-2005 and haven't really experienced a bear market bought a lot of stocks during the current downturn - specially after the Sensex breached 12000 and then 10000. They are now realising that just because the market has fallen a lot from its peak it doesn't mean that it can't fall even more.

So here are five more things you should avoid doing in the current market situation.

6.  Don't be swayed by the occasional bullish news. They should be noted and filed in the memory, but no action should be taken yet. Instances include the US bail out, the Chinese bail out, reduction of CRR/SLR/repo rates, slowing of inflation. These may appear to be good news and the market usually reacts positively to them. But you must understand that most of these are actually measures to put some upward impetus to the crashing economy and markets.

7.  Don't blindly trust your stock picking skills. You may have picked some real winners during the bull run. So did every one else. Bull runs lift all stocks - good, bad or ugly - to stratospheric levels. Be very careful in preparing your buy list in a down market. Do some 'paper' trading to see if your chosen scripts are going up, down or remaining static during the brief rallies. After some time you will realise which stocks should remain in your buy list.

8.  Don't assume that past performance will get repeated in future.  Just because certain stocks did very well in the later stages of the bull market doesn't mean that they will do well again when the market turns. Realty and cement stocks come to mind.

9.  Don't confuse inflation and capital protection. At times like these, you may be better off locking your cash into a two year fixed deposit at 10.5% and opt for monthly or quarterly interest. You may think that tax adjusted return will be 7% which will be eaten away by inflation of 9%. But a year hence, the inflation rate may fall below 6% (mostly due to higher base effect) and you will actually gain. Plus your capital will be safe. The periodic cash flow from interest income can be used if some unbelievable buying opportunities come by (like TISCO falling to Rs 100 or Bharti going below Rs 400).

10. Don't do some thing silly on a hunch because you are getting bored. This is a great time to actively learn the importance of patience. If you have targeted some interesting stocks (I'm looking at Maharashtra Seamless and Yes Bank), buy a small quantity and keep actively tracking it. When it breaches a previous low, don't jump in. Wait to see how far down it'll go. When it goes lower, wait some more. Till you see volumes almost disappear. Then buy some more.

Is this the time for Tisco?

During the glory days of the Bombay stock market - when there was no NSE, no Internet, no Reliance, no Bharti - the traders used to flock to Dalal Street to make their fortunes by trading Tisco (i.e. Tata Steel) shares.

It was the bellwether of the stock market till new age stocks like Reliance and Bharti pushed it to the background as a 'widows' stock. So it stayed in the background, while continuing to churn out excellent results by curtailing costs and judiciously expanding capacities.

Then Ratan Tata and his team decided enough was enough and it was time to look ahead and become a global player through acquisitions. Tisco made preliminary forays in South East Asia, buying plants in Thailand, China, Singapore, Vietnam. And then came the crowning glory - the Corus acquisition, that catapulted Tisco to the worldwide 6th position in the steel industry.

Historically, acquisitions have known to be value destructive for shareholders, and the jury is still out about the success of integrating Corus with Tisco. Already margins have been affected though turnover has risen manifold. Tisco management is working on that by trying to secure raw material sources globally, mainly for Corus that needs to buy its raw materials (and unlike Tisco which is an integrated plant).

However, the stock that had touched Rs 970 just a few months back, with no dearth of buyers, is now down to Rs 470 odd. That gives Tisco a Trailing Twelve Months (TTM) P/E of 6.7 and a P/BV of 1.6 as per June '08 results.

Technically also, the indicators are heavily oversold and ripe for an upward spurt. That does not mean Tisco can't go down to Rs 400 level. But for those who are trying to build a portfolio, this is a very appropriate time to enter.

An interesting bit of trivia for those who are still not convinced. The June '08 quarter's net profit of Rs 1686 Crores is just about Rs 130 Crores less than the net profit of ALL the listed cement companies (yes, that includes ACC, Ultra Tech, Ambuja, Prism, Birla Corp, JK, Sree, Madras, India, Chettinad, and the rest from north and south India).

So, the short answer to the question is 'yes'. This is a great time for Tisco (I mean Tata Steel - as a long time shareholder I just feel more comfortable with Tisco!).