Is the stock market rallying only on hopes of a repo rate cut? - a guest post

Sensex and Nifty had touched lifetime highs in Mar '15. A year-long correction led to both indices touching 52 week lows on Feb 29 '16 - losing 25% from their Mar '15 tops.

The stock market did a sudden volte face from the beginning of Mar '16 - as bears (i.e. FIIs) turned bulls and bulls (i.e. DIIs) became bears. What triggered the abrupt change in sentiment?

Was it belated awareness of market players that the global economy was not doing as badly as they thought? Did FIIs get encouraged by the governments decision of sticking to its fiscal deficit targets? Or, was it a mix of both? 

In this months guest post, Nishit argues that expectation of a repo rate cut by RBI in its policy meeting on Apr 5 '16 may be the real reason for the current market rally.

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The Government recently slashed interest rates on Small Savings, thereby dealing a very big blow to Senior Citizens who depend on interest income. Postal Saving Schemes have suffered big cuts. The whole idea was to bring interest rates in line with Bank Fixed Deposit rates and thus make it a level playing field for banks.

The Government should have excluded special schemes - like the Senior Citizen Savings Scheme and the Girl Child scheme - which were specifically targetted at financially vulnerable sections of the population.

The Government has also committed to stick to its fiscal stability road map. With inflation under control, this has set the stage for a 25 basis point (0.25%) rate cut in the RBI policy meeting on April 5th. Optimists are expecting a 50 basis points (0.5%) rate cut.

Reduced Fixed Deposit interest rates are going to put a lot of people in difficulties - especially those who have retired and depend on Fixed Income.

Repo and Reverse Repo rates are most likely to be reduced by 25 basis points now and 25 basis points in June, depending on the progress of the Monsoon. The markets have rallied based on this. The 10 year Government Bond is trading at an yield of 7.51%, which is the lowest in past several years.

The Government will have to kick start several infrastructure projects if demand has to be generated. Only slashing interest rate is not enough. Road projects are a prime example.

Cheap funds for the banks to lend out are just one aspect. What the Government is ignoring is the social aspect as well of welfare schemes.

A stock market rally based only on expectations of an interest rate cut is a temporary phenomenon. Unless backed by pickup in demand and increased Government spending, the rally will fizzle out.

The Government is helping the RBI cut rates, but the transmission of lower rates to borrowers and huge NPAs of PSU banks need to be factored in. The current market rally should last till the RBI policy. What happens next should be a period of consolidation.

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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. You can reach him at nish.stockid@gmail.com)

About the economic slowdown in China and its effect on the Indian stock market – a guest post

The recent FII sell-off in global stock markets left investors and analysts scratching their heads and predicting another worldwide recession. Why? Apparently because China’s growth slowdown will seriously affect the global economy and hence, their stock markets.

The fear is overdone. Contrary to popular belief, there is no correlation between GDP growth and stock market returns. If anything, the correlation is negative. When Chinese economic growth was in double digits, its stock market was performing badly. Contrast with the Indian market, which rose to a new high even though economic growth was sliding.

In this month’s guest post, Nishit explains why the explosive economic growth in China – which was financed by ever-increasing debt – has boomeranged. The slow but steady growth in India appears more sustainable, and is receiving increased attention from overseas analysts and investors.

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Over the last few days, both on television and on the Web, I have increasingly noticed that the global investing community is highlighting India as a bright spot in a world mired in economic slowdown.

Why is that so?

The main reason is the global poster boy for economic progress, China, is slowing down. China had invested in huge capacity expansion leading to idle steel factories and other Infrastructure supporting industries.

What China did was mindlessly tried to urbanise. As long as they were building new cites and roads, the capacity was getting utilised. But urbanisation can only be done up to a point. Now, China is left with ghost cities, a property market for which there are no takers and a stock market which is just collapsing. China tried to accelerate economic growth of 50 years in a period of 10-15 years.

Now, the slow progress of India is being seen as a more sustainable way of growth.

An upside of this global attention on India is that there will be a lot of foreign funds flowing in. This will take the stock market much higher than the current levels.

Also, with global attention being focused on India, the infrastructure sector will get a boost. One can already see good infrastructure building companies showing strong performances.

Martin Armstrong, the renowned analyst, visited India in August. Visits by high profile analysts will lead to more overseas investors discovering India and attracting more funds to India.

On Bloomberg, out of 10 emerging markets, India was shown as the best placed emerging market. Of course, all this has a flip side to it. If the Government doesn’t show progress on reforms, then the overseas interest will wane quickly.

Lower commodity prices will also be a boon for India. The stock market in the next year should move up at least 20% from the current levels, based on a combination of renewed interest from foreign investors and low commodity prices.

Interesting times ahead for investors in the Indian equity market for sure.

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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. You can reach him at nish.stockid@gmail.com)

Technical updates – L&T and JK Lakshmi Cement

Stocks from the infrastructure sector were in doldrums due to the economic slowdown, and had fallen to two year lows during the second quarter of 2013-14. The ground-swell from Modi’s campaign brought them out of bear markets.

Once the Modi government came to power, many infrastructure stocks rose spectacularly, and provided multibagger gains. However, during the past one year, there has not been much progress in disentangling of stuck projects or initiation of new ones. High interest rate also played spoilsport.

Earnings of infrastructure companies haven’t kept pace with their stock prices. While stock prices haven’t crashed, large-cap and mid-cap stocks are down from their two year highs, and have entered sideways consolidations. The stocks of L&T and JK Lakshmi Cement are good examples.

L&T

After a 1:2 bonus issue in Jul ‘13 (marked by bell on chart), the stock of L&T dropped to a low of 695 on Sep 3 ‘13. From there, it rose to touch a high of 1752 on Jun 9 ‘14 – a huge 150% gain in 9 months.

The stock has since been in a sideways consolidation within a ‘rectangle’ pattern. The stock broke out above the ‘rectangle’ on good volume support and touched a two year high of 1843 on Mar 2 ‘15. But it failed to sustain above the ‘rectangle’. It subsequently formed a ‘head-and-shoulders’ reversal pattern with an upward-sloping neckline within the ‘rectangle’, and corrected below its 200 day EMA.

Daily technical indicators are looking bearish and oversold. A pullback towards the upward-sloping neckline is a possibility. A ‘rectangle’ pattern is usually a continuation pattern – which means the eventual break out should be upwards. But there has already been a failed break out and a reversal pattern formation. It may be better to wait for upcoming annual results to decide whether to buy, sell or hold.

JK Lakshmi Cement

The stock of JK Lakshmi Cement rose from a two years low of 55, touched on Aug 5 ‘13, to a two years high of 407, touched on Jan 19 ‘15 – a whopping 640% gain in less than 18 months. The stock has been consolidating sideways within a ‘rectangle’ pattern with a downward bias since touching its Jan ‘15 high.

The stock is currently receiving twin support from the lower edge of the ‘rectangle’ (at 340) and its 200 day EMA. Despite the correction, valuation looks quite stretched.

Daily technical indicators are in bearish zones, but showing some upward momentum. A technical bounce is a possibility. Sequential QoQ results have shown decline in top and bottom lines for the past three quarters. Check annual results before initiating any action.

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.)

A look at Cap Goods and Infra sectors – a guest post

After rallying from their Dec ‘11 lows to their Jan ‘13 tops, both Sensex and Nifty indices have been undergoing corrective moves. While both indices are within 10% of their Jan ‘13 tops, some sectors have done much worse than the indices.

In this month’s guest post, Nishit takes a look at two such beaten down sectors – Capital Goods and Infrastructure, and builds a case for investing in stocks from these sectors with a long-term point of view.

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The Markets are going down every day and several sectors are being beaten out of shape. Capital Goods and Infrastructure are two such sectors. Fresh orders have dried up and stocks from these sectors are at multi-year lows. Let us try and examine these sectors.

Capital Goods and Infrastructure are the heart of any country’s economy. If infrastructure is not built well, no country can expect to do well. These sectors typically work in about 8 year cycles. They see a boom phase for a long time and then an equally long downturn as well.

The last cycle of investments stopped around 2008-2010 period. Hardly any new orders are being booked by most of the companies. The expansion of industry has also halted, and hence the Capital Goods sector is doing horribly.

Now, there will be two factors at play here. First, the existing infrastructure - specially the power plants and manufacturing industry - is getting old. This will lead to replacement demand. Second, as India grows there will be demand for additional power plants and machinery. More interior areas will get developed and become urbanised. This will lead to a lot of work for the Infrastructure companies.

There have been several companies both in the Capital Goods and the Infrastructure space which have been around for decades and have seen several business cycles and have returned stronger. Siemens, L&T, Bharat Bijlee, HCC to name a few.

We do not know how long the current downturn will last. It may well go on for a couple of years more. A smart way of playing this is by doing Systematic Investment in these companies. Most of them are at around 40-50 % from their peak valuations. Investments may be divided into 4 lot sizes. Add one lot now and then add another lot at about 15% higher or lower than the current valuation.

Metals is another sector where valuations have been beaten down. Remember no country can ever expect to grow without Steel being produced. Tata Steel and SAIL have been beaten badly out of shape and these companies have been around for several decades now. They certainly merit a look.

The downturn can go on for some time to come and all investments in such sectors need to be done with a time horizon of at least 3 – 5 years. It is a tough task for most of us but only by investing on such larger time frames can real money be made in the equity markets. The Benchmark Nifty may be down only around 10–12% from its peak in January ‘13 but Steel, Capital Goods and Infra stocks are down almost 40-50%. In every fresh leg of down move, different sectors get beaten down. Banks are currently facing the music. Information Technology Sector could be the next one.

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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.)

Will a poor monsoon affect your portfolio? – a guest post

This year, monsoon rains have been conspicuous by their absence. While a few parts of the country have received excess rainfall, that has been the exception than the rule. Drought-like conditions are prevailing in many parts. In other parts, rainfall has been scanty to mediocre.

By all accounts, rainfall will be below average this year. What will be the effect of a poor monsoon on your investment portfolio? In this month’s guest post, Nishit looks at a few sectors that may get negatively affected by a poor monsoon and a few that may not do too badly.

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The monsoon this year is likely to be deficient. Which sectors and stocks will feel the impact? This is a burning question in the minds of investors. Let us try and analyse the impact of a poor monsoon.

The rainfall deficit has shrunk to about 15% from 22% a couple of weeks earlier. Also, the reservoirs are filling up. They are now 96% filled as compared to the last 10 years’ average and 80% filled as compared to last year at this point of time.

With steady rains falling across the country, there should not be any drinking water problem. Agriculture output will be hit, but there will not be food shortages - thanks to the surplus food grains of the previous years.

Having said all this, what will be the impact? The hardest hit will be the farmer. He will have less produce to sell in the markets and consequently less money to spend. All the rural focused sectors will be hit. The hit will not be immediate but come during the harvest season, a few months down the line.

The farmers will not be celebrating the festive season by buying new motorbikes. Thus, the 2 wheeler segment may face the biggest hit. When the times are down, farmers will also not invest in new tractors and farm equipment. This also means tractor manufacturers will face lean times.

In recent times, FMCG majors like HUL and ITC have risen to new all time highs based on uncertainty in the markets. They may take a major hit if the rural population cuts down on spending. Less colas and chips will be consumed. Sectors like IT (Information Technology) will be neutral to a poor monsoon. The banks may take a hit in the form of NPAs in case loans to farmers turn bad.

Amidst all this gloom, the sugar sector - especially the sugar mills having previous stock - will flourish. The farmers may not get much, but the sugar mills will benefit from higher realisations thanks to surplus inventory.

Overall, Indian GDP may come down by 0.6% or so. Surprisingly, in previous years of scanty rainfall, the stock markets have actually done well. The fiscal deficit may increase if the government comes up with any populist schemes. Higher food grain prices may lead to higher inflation forcing the RBI to go slow on interest rate cuts.

In the current scenario, it pays to focus on sectors like sugar and also sectors which may not get impacted much by a poor monsoon. PSU banks with their good dividend yields offer one area where folks with expectations of moderate returns may park their funds.

Cyclical sectors like steel and infrastructure, which are currently beaten down, can be nibbled at. Also, this may be the last chance to lock in at relatively high rate of interests. Bank FDs (ICICI Bank is still offering 10% to Sr Citizens for a period of 4.9 years and Bank of India 9.7%), NCDs (Shriram Transport offered 11.4%), some stocks would be a good mix to be invested in right now.

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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).

Why small investors should avoid ‘cheap’ stocks

There are several reasons why small investors should avoid ‘cheap’ stocks, and I will take them up one by one. Before that, one must understand what is meant by ‘cheap’ stock.

Investopedia.com has the following definition:

“The illegal practice of issuing stock options at artificially low prices shortly before an initial public offering. Often underwriters will require a company to have more qualified management before they can go public. They attract these qualified individuals by giving options with a low exercise price.”

This was a practice which was prevalent prior to and during the dot.com boom in the USA, and is not unheard of in India. While it can lead to significant profits, the average small investor won’t be able to participate - unless his uncle or friend’s father was the promoter of the company. If a company is trying to sell its stock through bulk SMS and email messages at a lower price than its forthcoming IPO price, chances are that it is a ‘dud’ company and best avoided.

Then there are those companies that were the apple of investor’s eyes during the previous bull market, and reached stratospheric levels just before the crash in Jan 2008. Real estate stocks were at the forefront, followed by the stocks with the word ‘infrastructure’ in their name. Most of these apples had rotten cores. They have not only become cheap stocks, but continue to get cheaper by the day. Don’t go anywhere near them.

There are cheap stocks which are also called ‘penny stocks’ because they trade below Rs 10. Most of them are unknown, fraud companies who have no business and no intention of doing any business. Occasionally they boost up their share price from Rs 3 to Rs 8 by planting fake stories in the media about the great opportunity for investors once they dismantle the fourth rate defunct plant that they have bought in Uzbekistan or Burkina Faso and reinstall the plant in Jhumri Tilaiya. Avoid such stocks like the plague.

Some cheap stocks may appear cheap, but are not. A Re 1 face-value stock trading at Rs 15 is equivalent to a Rs 10 stock trading at Rs 150. A Rs 10 face-value stock trading at Rs 15 may not be cheap either, if it belongs to a loss-making company, or one that is trading at a P/E of 80 or 100. Stay away from such stocks.

What about stocks that appear relatively cheap with P/E ratios below 15 that generate strong cash flows from operations, have low debt/equity ratio and double-digit profit margins? Ah-ha, now we are talking. I just love to dig and find such stocks. They are the ones that will give a nice boost to your stock portfolio’s performance.

How to select a stock - an exercise for readers

From time to time, I receive requests from readers to write about how to select stocks. I wrote a post back in Feb '09 titled:

How to Select Stocks within Infrastructure Sector

In that post, I had highlighted the importance of studying the cash flows from operating activities (a statement usually well hidden in the depths of an Annual Report) which separates the champions from the pretenders.

This time around, I would like to put the onus on the readers to do the selecting. Readers need to use the 'Comments' link below the post (or, if you are feeling shy, send me an email) to briefly explain which one of the three stocks is the best choice and why.

To remove any bias, the sector name and the names of the stocks are not being revealed. All three are manufacturing companies that sell their products in India and overseas. Let us call them S, I, and N.

They are fundamentally strong small-cap companies that have been around for more many years, and outperformed the Sensex by going past their Jan '08 bull market highs during the recent rally.

Given below are the brief details of the three stocks, based on which readers would need to make a choice. Why only these criteria and not others? Because these are the ones I take a quick look at to decide whether a more detailed study is warranted.

Stock 'S' : Almost 50 years old, part of an NRI group.

• Equity: Rs 4 Cr (Promoters hold 75%); EPS: 20; P/E: 4; NPM: 8%; RoE: 14
• Sales: Rs 68 Cr; M-Cap: 32 Cr; Debt: negligible
• Dividends: steady for the past 5 years
• Technicals: fell to the level of the Jan '08 top during the recent correction; after a brief consolidation has slipped down

Stock 'I' : 35 years old, Indian company with foreign collaboration.

• Equity: Rs 9.5 Cr (Promoters hold 60%); EPS: 6.5; P/E: 6; NPM: 10%; RoE: 9
• Sales: Rs 80 Cr; M-Cap: 37 Cr; Debt: negligible
• Dividends: intermittent in 3 of the past 5 years
• Technicals: fell to the level of the Jan '08 top during the recent correction; seeking support there

Stock 'N' : 30 years old, Indian company with foreign collaboration.

• Equity: Rs 8.5 Cr (Promoters hold 80%); EPS: 30; P/E: 6; NPM: 8%; RoE: 17
• Sales: Rs 190 Cr; M-Cap: 150 Cr; Debt/Equity: less than 10%
• Dividends: rising during past 4 years
• Technicals: fell during the recent correction but remains 60%above the Jan '08 top

Note: Assume all three companies have positive cash flows from operations. NPM = Net Profit Margin; RoE = Return on Equity. The indicated figures are rounded-off.

The reader with the best logical explanation for the choice will be duly acknowledged on my blog. I may or may not agree with the choice.

So put on your thinking caps, and give it your best shot.

Does economic growth lead to higher returns for stock market investors?

A recent article in Business India magazine warned that investors 'should be wary of relying on a link between overall growth of the economy and returns on specific company stocks'.

The article written by Hugh Sandeman, MD of Langham Capital, concludes with the following statement:

"...the macro-economic growth story is a cue for caution, not just celebration."

That sounds counter-intuitive, doesn't it? If the economy is growing, then more goods are being manufactured, roads and bridges are being built, every one has more disposable income, so more shares will be bought and their prices will go up. Right?

Not quite. In his book 'Stocks for the Long Run', Jeremy Siegel presents some interesting research data to show that 'economic growth has nowhere near as big an impact on stock returns as most investors believe'.

In one chart, percentage returns (in dollars) for 16 developed countries was plotted against each country's percentage real GDP growth from 1900 to 2006. Real GDP growth had a negative correlation with returns from the stock market. Higher the economic growth in individual countries, lower was the returns to equity investors.

A similar chart for 25 developing countries (including India and China) shows a similar negative correlation, in spite of the massive returns provided by the stock market indices of these countries in recent years. Are we missing some thing?

Turns out that the growth in aggregate earnings and dividends do increase along with GDP growth. But for investors the returns are based on earnings and dividends per share.

Economic growth is dependent on expenditure on R&D, technology upgradation, increase in manufacturing capacities, building new factories and offices. Such expenditure needs to be funded - either through loans, or through issuing new (or additional) equity shares, or both.

The interest burden and equity dilution leads to lower rate of growth in EPS and dividends per share. While internal accruals (read: positive cash flows from operations) can fund expenditure in the shorter time frame, Siegel's research shows that in the longer term a 10% increase in GDP requires a 10% increase in the equity capital.

The cautionary note in the article was directed particularly at asset heavy sectors like infrastructure, energy and shipbuilding. Investors in IVRCL Infrastructure may have noted the recent downgrade in its credit ratings due to a large debt burden.

Pantaloon and Cranes Software are other examples of how rapid growth funded through loans and equity can quickly lead to poor share holder returns.

Stock Chart Pattern - IRB Infrastructure (An Update)

The stock chart pattern of IRB Infrastructure had made a classic bullish double-bottom pattern when I had taken a look at it in the beginning of June last year. Based on the double-bottom pattern, I had indicated a minimum target of 229.

It is time for an update. Let us have a look at the 9 months bar chart pattern of IRB Infrastructure:-

The stock hit 161 on Jun 5 '09 and immediately dropped to 125. That level provided good support and the stock resumed its upward climb on growing volumes, as indicated by the OBV.

The stock made a high of 227 on Aug 27 '09 - almost meeting the minimum target mentioned within a short span of 3 months - before going into a 5 weeks long sideways consolidation between 200 and 220.

It broke upwards on decent volumes on Oct 6 '09 and eventually went on to make a high of 280 on Nov 19 '09. A corrective move saw the stock make a low of 233 on Dec 18 '09. A high volume breakout on Jan 8 '10 saw the IRB stock make another high at 280 on Jan 14 '10.

The chart pattern thus formed a bearish 'double-top' and it is no wonder that the stock once again entered a corrective phase. If you had entered at lower levels, this would be a good time to book partial profits. The minimum downside target from the double-top is 186.

The bulls are still in control as the stock price is just above the 20 day and 50 day EMAs and well above the 200 day EMA. The MACD is barely positive. The RSI is slightly above the 50% level.

The company is apparently doing quite well and year-end Mar '10 should see a sharp increase in profits as road toll revenues from completed BOT projects start to kick in. High promoter holding and negligible public float could lead to wide price fluctuations.

Bottomline? The stock chart pattern of IRB Infrastructure is showing some tiredness after an excellent rally. Taking some profits home is never a bad idea, particularly when the stock appears to have run ahead of its valuations.

Stock Chart Pattern - Container Corporation of India

Container Corporation is a Govt. of India company, promoted by the Ministry of Railways. Regular readers of this blog may know of my aversion to government-owned companies. So why am I discussing the stock chart pattern of Container Corporation?

A one-word answer: monopoly. I like a company that is well-run, generates cash flows from operations, makes profits, pays dividend and has low debt. If it has a monopoly in its line of business - in this case, storing, handling and transporting of containerised goods through the railway network, a classic play on the India infrastructure story - then it makes the company doubly attractive.

The government holds 63% of the equity. FIIs hold more than 25%. The public holds just about 1%. No wonder it has a high price, but because of its profitability, trades at a P/E of less than 18. If there is one drawback, it is the low volume of trading.

Last year's top line was flat due to the economic down turn that severely affected exports and imports. Still, the company managed to improve its operating and net profit margins.

The one year bar chart pattern of Container Corporation is a clear example of a market favourite that is charting its own course, far removed from the gyrations of the BSE Sensex index:-

The stock made a low of 540 in Nov 21 '08 and a higher low of 610 on Mar 4 '09, before embarking on a bull rally with periodic corrections and consolidations. On Jul 29 '09, the stock hit a high of 1149, a level it had last touched in Sep '07 (adjusted for 1:1 bonus issue).

Thereafter, the stock has started consolidating in a triangle pattern. Of note is the big gaps between the 50 day and 200 day EMAs and between the stock price and the 50 day EMA (marked on the chart with blue arrows).

Does that mean the stock will face a trend reversal? Probably not. But a good correction may take it down to seek support at its 50 day EMA at around 1000, and then to the 200 day EMA at around 850.

The triangle pattern is usually a continuation pattern, so the stock price may very well move further up and try to reach its all time high of 1222, hit on Jun '07, before starting the correction. But triangles are quite unreliable, and the stock may just continue sideways for a while, negating the triangle.

Other than the EMAs, which are moving up strongly, the other technical indicators are showing weakness. Both the RSI and MFI have slipped down from overbought zones. The MACD is positive, but below its signal line. The slow stochastic is dropping towards the 50% level. These are bearish signs, indicating a correction in the near term.

Bottomline? The stock chart pattern of Container Corporation demonstrates that given the proper environment and business model, a government owned company can generate excellent returns. Investors would do well to keep this stock on their 'watch list' and enter on dips.

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

Stock Chart Pattern - IRB Infrastructure

Before discussing the stock chart pattern of IRB Infrastructure, I have to make a confession. Normally, I would not analyse a stock about which I have no idea whatsoever. More so, because it is in the engineering and construction sector which is notoriously opaque in its accounting practices.

Yesterday, I read this article in the Business Standard about IRB Infrastructure and was intrigued enough to take a peek at the stock chart pattern. What I saw was so fascinating, that I could not pass up the opportunity of sharing it with my readers.

Without further ado, let us take a look at the 1 year bar chart pattern of IRB Infrastructure:-

What you see above is a classic double-bottom formation. The first bottom was formed at Rs 65 on Dec 2, '08. The second - slightly higher - bottom was formed at Rs 77 on Mar 27, '09. Almost a 4 months gap between the two bottoms. This long gap ensures the solidity of the bottom formation.

In between, the stock price rose all the way to Rs 147 on Dec 30, '08 and then gradually drifted down on low volumes. Note how the volume rose significantly as the stock price moved up from the second bottom - in absolute copybook fashion.

The stock is currently facing resistance near the previous top of Rs 147. A correction down to its 20 day EMA - which has just crept above the 200 day EMA - can be expected before the next rise.

The slow stochastic and RSI are in overbought zones. The MACD is positive but made a lower top. Likewise for the ROC. The technical indicators are also hinting about a correction.

Double-bottoms provide price target indications. The distance from the lower bottom of 65 to the top of 147 gives a Rs 82 difference. The minimum upside can be (147+82=) 229. That would take it close to the high of 222 made on Apr 29, '08 and gives a potential 60% upside from the current market price of Rs 143.

Bottomline? Price target mentioned is based purely on the stock chart pattern of IRB Infrastructure. I haven't checked the fundamentals at all. Any one planning to invest should cross-check the Business Standard article with company annual report and SEBI EDIFAR site for veracity of the figures mentioned.

Is the stock market reflecting everyone's excessive euphoria on election results?

There is a well-known myth in the stock markets - usually touted by 'experts' when the markets are moving up. It goes something like this: the stock markets always discount the future.

Nothing could be farther from the truth. Just flashback to the month of September 2007. The sub-prime crisis had begun to affect the financial sector as far back as in Feb 2007.  By the summer, it had all the signs of a full-blown crisis.

Indian stock markets had the grand finale of the bull run between Oct - Dec 2007. The markets should have fallen instead because the future was bleak. What the market really does is discount the hopes and aspirations of the buyers and sellers.

The UPA won a mandate that even surprised them. The decimation of the Left parties will surely lead to hastening of the financial reforms process. The sidelining of the third and fourth fronts by the electorate means a comparatively stable government with a set of coalition partners who won't be able to pull much weight because of the few seats they hold.

Please remember that the new government hasn't been formed yet. After it gets its house in order, it isn't going to rush into reforms and privatisations. A budget will need to be placed and approved. That will take 4-6 weeks.

There may be a strong dose of taxation to cover the huge deficits caused by loan waivers, subsidies, pay increases. The Congress party policies have always been socialistic and their poll plank of concern for the 'aam aadmi' ('average Joe') will need to be catered to. That may not be palatable for market participants.

Does all that justify a historic, first ever, double upper circuit in the Indian stock markets, followed by suspension of trading for the day? The video footage of cheering, table-thumping, laptop-kissing traders and business media analysts would probably indicate a resounding  'YES'.

But look at the volumes traded. Barely Rs 3000 Crores. Most of it in F&O. That  seems like a desperate attempt at short covering rather than frenzied buying by investors. Today's up move close to the BSE Sensex index level of 15000, followed by a flat close means there were as many sellers as buyers.

In this post in Feb '09, I had categorised financial news into good, great, bad and worse and discussed their effects on the stock market and advised investors about what they should do.

Where does news of election results fit in? Regular political news have very little impact on the markets - other than wars and terror attacks. But news of a surprising election result bringing back a pro-reform team without the excess baggage of the Left parties is definitely 'good news' for the stock markets.

Why isn't it 'great news'? Not yet. That may happen after a year or two if the pace of reforms and divestments from public sector companies really push-start our economy forward to 9% GDP growth.

Till then, we have to contend with results season. Most companies have postponed results declarations till the end of June '09. Many results will be awful. The real estate and infrastructure companies that have seen an unjustified spurt recently will face selling pressure. (Punj Lloyd has already declared a huge Q4 loss.)

My advice to investors is to stay calm, not feel 'left-out' and use the temporary price spurt on 'good news' to get out of non-performing stocks. Saner voices will prevail and euphoria will evaporate.

The BSE Sensex index is looking overbought. It may not go down to 8000, but may see 10000-12000 levels in the near future. That will be a better time to start buying.

Stock Market News, Financial News - Mar 12, 2009

Factory output drops in Jan, more falls seen

By Surojit Gupta and Rajkumar Ray

NEW DELHI (Reuters) - India's factory output fell for the third time in four months in January, and with government and Reserve Bank steps to lift a sagging economy likely to take months to kick in further falls are expected.

Industrial production fell 0.5 percent in January from a year earlier, a marginally better performance than the previous month's upwardly revised contraction of 0.6 percent.

(More ...)

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Tata Comm sees capex up to $500 mln next FY

NEW DELHI (Reuters) - Tata Communications has resources to fund ongoing capital expenditure and plans to spend about $400-$500 million during the fiscal year that begins April 1, a senior official said on Thursday.

Srinivasa Addepalli, senior vice president for corporate strategy, told reporters that did not include funds for a pending Wimax auction due later this year. (More ...)

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Bharti Airtel CEO says to continue as CEO, joint MD

NEW DELHI (Reuters) - Bharti Airtel chief executive Manoj Kohli said on Thursday he had sold his shares in the firm for personal reasons, but still had 180,000 options and would remain as CEO and joint managing director of India's top mobile operator.

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Nagarjuna Construction gets orders worth 2.63 billion rupees

MUMBAI (Reuters) - Nagarjuna Construction Co Ltd said on Thursday it received three new orders worth a total 2.63 billion rupees each of which has to be completed over a period of 24 months, it said in a statement to the exchange.

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Global economy to shrink 1-2 pct: World Bank

Financial Express

The global economy is on track for its worst recession since the 1930s with output likely to shrink by 1-2 per cent this year, World Bank President Robert Zoellick told the 'Daily Mail' newspaper.

Central and eastern European countries were particularly vulnerable, he said, urging rich nations to do more to fill the financing gap left by an exodus of capital from the developing world.

"My guess is that growth will probably fall about 1 to 2 per cent," he told the paper in its Thursday edition. (More ...)

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More private life insurers freeze branches

Hindustan Times

The list of private insurance firms freezing branch expansion is getting longer.
After ICICI Prudential and Bajaj Allianz, others such as Max New York Life, Kotak Life and Reliance Life are following suit, while Aviva Life Insurance has said that it will be selective in opening branches, depending on the market conditions.

Private life insurers are saying that their focus has now turned to managing rising expenses, and increasing the productivity of employees and agents, as capital runs scarce. (More ...)

Stock Market News, Financial News - Mar 11, 2009

Citigroup cheers markets but economies still bleak

By Jonathan Stempel and Sachi Izumi

NEW YORK/TOKYO (Reuters) - Citigroup said it was profitable in the first two months of 2009 and Toshiba was reported to be set for an operating profit of $1 billion next year, two rare shards of corporate news to lift markets.

Asian stocks rose on Wednesday, following a strong rally on Wall Street, but economic news remained gloomy.  (More ...)

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'US protectionism not to impact Indian IT'

By ENS Economic Bureau

At a time when US President Barack Obama's statements on curbing tax breaks for outsourcing companies in the US rang alarm bells in the Indian IT sector, Indian IT representative body National Association of Software and Service Companies (Nasscom) today said it does not expect the recent protectionist measures taken by the US government to impact the Indian IT-BPO industry.  (More ...)

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NHAI plans funding to road developers

By Gunjan Pradhan Sinha, Indian Express Finance

In a bid to prevent work on road projects from coming to a halt, the government is considering a proposal to allow the National Highways Authority of India (NHAI) to extend working capital loans to developers. In a meeting held on March 7, the roads secretary and NHAI officials discussed the possibility of such a move with road developers. According to developers present at the meeting, the move may help them tide over the tight credit situation they face for projects undertaken by them under the National Highways Development Programme (NHDP).  (More ...)

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LandT, 8 others in race for Chennai mega container terminal

By Financial Express Bureau

Nine companies have submitted their requests for qualification for the development of India's first mega container terminal at the Chennai port. Estimated to cost Rs 3,686 crore, the terminal, with a rated annual capacity of 4 million TEUs, is likely to become operational by 2012-2013.

The last date for submitting the request was on March 9, 2009. The applicants are: LandT Transco Pvt Development Project Ltd, Chennai; Navayuga Engineering Co Ltd, Chennai; DP World Pvt Ltd, Mumbai; IL andFS Maritime Infra Co Ltd, Mumbai; Vadinar Oil Terminal Ltd, Mumbai; Mundra Port and SEZ Ltd, Ahmedabad; Lanco Infratech Ltd, Hyderabad; FGI Group of companies, Malaysia and GVK-Leighton Consortium, Mumbai.  (More ...)

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Nine million GSM users added in Feb, tally rises to 277 million

By Financial Express Bureau

The country added a total of 9 million GSM subscribers in February, taking the total tally to 277 million at the end of the month. This marks an increase of 3.43% in the total number of subscribers, compared to the month of January.

The country's largest telecom operator, Bharti Airtel, added the highest number of GSM subscribers during the month, at 2.5 million. With this, the total number of mobile subscribers for the company went up to about 91million. Bharti continues to have the largest market share in the GSM segment with 32.88%. Bihar once again added the largest number of subscribers for the company, with 4 lakh additions. Karnataka added the second highest number of subscribers with around 3 lakh, with Rajasthan close behind with 2.9 lakh additions in the month.  (More ...)

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 ...)

How to Select Stocks within Infrastructure Sector

During the later stages of the previous bull market, stocks from the real estate and infrastructure sectors were on the top of investor buy lists. Those who invested in these sectors are sitting on massive losses as most stocks have fallen much more than the Sensex.

Many inexperienced investors are tempted by the current low prices to try and lower their average holding cost per share. That would be akin to 'catching a falling knife'. Averaging down may be a smart move if you are 100% certain about the management quality and the business outlook of the company. Most real estate and infrastructure companies will not qualify on either count.

Unfortunately, despite the massive fall in prices of real estate and infrastructure shares, investor fascination has not completely waned. Last week, I received a couple of investor queries that brought this shockingly to the forefront.

One asked: Which one is a better buy - IVRCL Infra or GMR Infra? The other asked: Is Punj Lloyd a good buy at Rs 95?

I decided to do a little digging by visiting the Rediff site. Here is what I found (for three years ending Mar '06, Mar '07 & Mar '08):

IVRCL had negative cash flows from operations for all three years - going from -83 Cr to -377 Cr; decreasing Net Profit Margins (NPM) - 6%, 5.9%, 5.6%; EPS of Rs 15.80 (in '08).

GMR had negligible cash flow from operations in '06 and negative cash flows of -7 Cr and -57 Cr in '07 and '08; wildly fluctuating NPM - 58%, 8%, 60%! EPS of a miniscule Rs 0.34 (in '08).

Punj Lloyd had negative cash flows from operations for all three years - going from -84 Cr to -233 Cr; marginally increasing NPM - 2.5%, 2.7%, 4.9%; EPS of Rs 7.30 (in '08).

Now the three years in consideration also happened to be the three biggest boom years for the infrastructure sector in India. And our three 'gems' failed to earn a single Rupee in cash! Wonder what they will do during this prolonged Bear Market? Keep wondering - just don't touch these stocks.

Since I am a firm proponent of buying only the best and leading stocks in any sector, I took a quick look at the figures of L&T. And this is what I found.

L&T had positive cash flows from operations for all three years - 1369 Cr, 2130 Cr and 1945 Cr; increasing NPM - 6.7%, 7.7%, 8.5%; EPS of Rs 74 (in '08). Based on these figures, I am inclined towards discounting GMR's ridiculously high NPMs in '06 and '08. (May be these were typos on the Rediff site.)

Since all four companies have shares with face value of Rs 2, the EPS figures are comparable. On all counts, L&T is the clear choice - and by my reckoning, the only stock to be considered in engineering and construction within the infrastructure sector.