Stock Chart Pattern: Akzo Nobel (ICI) India – An Update

The Indian paints industry is dominated by Asian Paints - with more than 50% market share. Akzo Nobel (formerly ICI) India is an 'also ran' with 11% market share - behind Berger Paints (19%) and Kansai Nerolac (15%).

So, what is the investment rationale for this company? It is part of the largest paints and coatings company in the world, and has been gradually rationalising its India operations and slowly gaining market share.

Valuation looks more attractive than its larger competitors. Through organic (greenfield and brownfield) as well as inorganic expansions, the company has been growing at a 20% CAGR over the past 5 years (against an industry average of 12%).

The daily bar chart pattern of Akzo Nobel India had completed a large 'double bottom' reversal pattern around 1200 in Feb '16, and rallied strongly  to touch a lifetime high of 1740 on Aug 31 '16.

Note that all four daily technical indicators showed negative divergences (marked by blue arrows) by touching lower tops while the stock touched its lifetime high.

Over the next two months, a 'triple top' reversal pattern was formed. That initiated a correction which was exacerbated be Modi's demonetisation announcement in Nov '16.

The stock price dropped sharply below its three EMAs into bear territory, and touched a low of 1375 on Nov 23 '16. After some sideways consolidation, it dropped even lower to 1328 on Jan 16 '17.

Note that three of the technical indicators - MACD, ROC, RSI - showed positive divergences (marked by blue arrows) by touching higher bottoms while the stock price dropped lower.

That was a trigger for the stock to start its recovery. Resistance from the long-term 'support-resistance' level of 1460 has been overcome. The 'golden cross' of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.

The stock may consolidate or correct a little before resuming its up move. The company has a history of strong cash flows and good dividend payments. Patient investors can think about adding it to their portfolios.

Stock Chart Pattern: Akzo Nobel (ICI) India – An Update

The previous technical update of the stock chart pattern of Akzo Nobel (ICI) India was posted back in Nov ‘11 (marked by grey vertical line in chart below). The stock price had been in a corrective mode after touching an all-time intra-day high of 1045 in Jul ‘11.

Disappointment with quarterly results was compounded by the merger with three unlisted subsidiary companies that increased the shareholding of the overseas promoter. Bears slammed the stock, and the price dropped to an intra-day low of 693 in Dec ‘11.

The low, which coincided with the low made by the Sensex, also happened to fall within the long-term support/resistance zone between 680 and 750. A further signal to bulls came in the form of positive divergences in all four technical indicators that touched higher or flat bottoms (marked by blue arrows) while the stock’s price touched a lower bottom.

The 18 months daily bar chart pattern of Akzo Nobel shows why it is a stock that small investors should think of accumulating on dips:

After making a ‘V’ shaped recovery from the support zone between 680 and 750, the stock price has been in a steady uptrend characterised by sharp price spurts on high volumes, followed by periods of correction and sideways consolidation – typical price behaviour for a buy-and-hold kind of stock.

The regular corrections and consolidations may have tested the patience of investors interested in making quick profits, but improved the technical ‘health’ of the price chart, allowing it to move upwards.

While the Sensex and Nifty topped out in Jan ‘13 and have been correcting for nearly 4 months, Akzo India kept moving higher. The stock rose to touch a new all-time intra-day high of 1095 on Apr 4 ‘13, but formed a ‘reversal day’ pattern (higher high, lower close) that started another spell of correction.

Daily technical indicators are looking bearish. MACD is below its signal line and slipped back into negative territory. ROC crossed above its 10 day MA but remains negative. RSI is about to enter its oversold zone. Slow stochastic has emerged from its oversold zone. Some more correction/consolidation is likely.

Note that the stock is trading above its rising 200 day EMA, and is in a bull market. A 50,000 tonne greenfield manufacturing facility at Gwalior – expected to start commercial production later in the year – should add to top and bottom line growth. The company is debt-free and sitting on a sack full of cash.

Bottomline? The stock chart pattern of Akzo India (ICI) Ltd is undergoing a correction in a bull market after touching an all-time high. Such corrections offer entry opportunities, but it pays to be careful near all-time highs. So maintain a strict stop-loss if you decide to enter. Alternatively, check the forthcoming annual results before entering.

Stock Chart Pattern: Akzo Nobel (ICI) India – An Update

During my previous technical update of the stock chart pattern of Akzo Nobel (ICI) India more than a year back, the stock had corrected down to 845 after touching an all-time high of 970 in Sep ‘10. The technical indicators were looking oversold while the OBV indicated accumulation. That led me to surmise that the next up move could touch the 4-digit mark. I had also suggested that any drop below 845 could be used to enter with a stop-loss at 750.

It is time to have a look at the two years bar chart pattern of Akzo Nobel and see what kind of returns the stock has provided:

The stock did eventually rise to a new all-time high of 1045 in Jul ‘11, but not before inflicting pain on investors. Such are the hazards of relying on technical analysis – chart patterns don’t always play out as per expectations.

Note that the 750 level provided good support during Nov ‘10. It was briefly penetrated in Dec ‘10, before the stock price bounced up nicely. Through most of Jan ‘11, the stock managed to stay above the 750 level. But once the support was broken, the stock fell quickly to a low of 680 – a 30% correction from the top of 970 that briefly pushed the stock into a bear phase. The 680 level coincided with the top of Jan ‘10 – an example of how a previous top can often act as a support.

The bear domination didn’t last long. Within 5 weeks of touching the low of 680 in Feb ‘11, the stock broke out above the 750 level on a sharp volume spike, and proceeded to rally to an all-time high over the next 4 months.

Couple of interesting points to note here. When the stock price dropped to its 52 week low of 680 in Feb ‘11, all four technical indicators touched higher bottoms (marked by short blue arrows). The combined positive divergences gave advance notice that the bear phase won’t last long. Again, during the four months long rally to the all-time high of 1045 in Jul ‘11, all four technical indicators reached lower tops (marked by long blue arrows). The combined negative divergences warned that the bull rally was over.

Technical analysts often claim that the fundamentals are ‘in the price’. In this case, they would have been correct. Q2 ‘12 results announced last month showed good top line growth but a sharp drop in profits at the gross and net levels, thanks to the rise in raw material costs. The stock price dropped vertically below the 200 day EMA post the results announcement to the support of the blue up-trend line, but the stock had already corrected more than 10% from its peak prior to the results.

The 200 day EMA is providing resistance to the efforts of the bulls to take the stock price back into a bull market. The falling 50 day EMA is still above the long-term moving average, but a cross below the 200 day EMA (‘death cross’) may push the stock price down to the support zone between 680 – 750.

The technical indicators are giving mixed signals. The MACD is above the signal line, but inside negative territory. The ROC is falling sharply towards its negative zone. Both the RSI and the slow stochastic are above their 50% levels. Bounce ups on good volumes from the up-trend line, the 750 level or the 680 level may be good entry points.

Bottomline? The stock chart pattern of Akzo India (ICI) Ltd is an example of why small investors should look at fundamentally strong companies with solid balance sheets and trustworthy managements. While the Akzo stock has provided zero returns (not counting dividend of Rs 18 per share) in the past 12 months, it has given nearly 50% returns over the past two years. Compare that with the Sensex, which has provided negative returns in the past 12 months and zero returns in the past two years.

Stock Chart Pattern: Akzo Nobel India (ICI India) – An Update

More than a year back (in Sep ‘09), I had analysed the chart pattern of ICI India – now renamed Akzo Nobel India. The stock had just broken above the resistance of the 550 level, after consolidating in a bullish ascending triangle pattern. The resistance level then turned into a support level for the next couple of months.

Dutch multinational Akzo Nobel, a world leader in specialty chemicals and coatings, bought ICI UK’s paints business two years back and became the new owners of ICI India. They took their time in consolidating the Indian business by selling off the remaining non-core subsidiaries and businesses. Only the starch business still remains.

The end result? A pure paints company, debt free with a cash kitty of nearly Rs 1000 Crores, ready to expand, acquire and take on the big boys like Asian Paints, Kansai Nerolac and Berger Paints.

The market has become aware that this former diversified subsidiary of a UK company with assorted unrelated businesses is about to transform itself into a growth-oriented and focussed paints and coatings company that can benefit from India’s infrastructure growth story.

Let us have a look at the 13 months bar chart pattern of Akzo Nobel India (formerly ICI India) and find out how the stock has fared, and what lies ahead:

The stock consolidated in a sideways band between 550 and 600 before breaking out in mid-Dec ‘09, and moved up to touch a high of 680 on Jan 22 ‘10.

Nothing much happened during the next four months, as the stock declined slowly down to the support of the 200 day EMA. While the MACD, RSI and slow stochastic drifted down with the stock, the OBV remained flat. The positive divergence gave a hint that accumulation was going on. Note the volume spikes while the stock was oscillating in the narrow space between the falling 20 day EMA and the flat 200 day EMA.

The inevitable happened in Jun ‘10. The Akzo Nobel India stock rose sharply from a low of 570 to 750, and then started a rally that culminated at the all-time high of 970 on Sep 21 ‘10. A gain of 70% in 4 months. There may not be a better example of the benefits of holding a fundamentally strong stock for the long-term.

Note that the MACD, RSI and slow stochastic made lower tops as the stock moved higher from Jun ‘10 to Sep ‘10. The negative divergences has caused a month-long bout of profit booking. The stock hit a low of 845 on Oct 18 ‘10 retracing 31% of the 400 points rise, and has dropped below the 50 day EMA. The 20 day EMA is about to do likewise.

The technical indicators are suggesting that the stock is oversold. The MACD is below the signal line and falling in negative territory. The space between the two lines is widening. The RSI and slow stochastic have both entered oversold zones. The slow stochastic can remain in the oversold zone for a while, but the RSI rarely spends much time in oversold territory.

But the most interesting is the OBV. It has remained flat while the stock fell from 970 to 845. Smart money is accumulating the stock, and the next price spurt could reach 4 digit territory.

Bottomline? The stock chart pattern of Akzo Nobel India (formerly ICI India) is taking a break in the midst of a major up move. Existing holders can remain invested with a stop-loss at 750. A drop below 845 can be used to add/enter. With reserves exceeding 25 times the equity capital of Rs 37 Crores, a bonus issue will not be surprising.