Indian economy poised to take off – a guest post

The stock market has been in a down trend for almost 9 months. FIIs have turned sellers. Already some experts are predicting a long bear market.

The economy seems to be in doldrums. Corporate revenues and profits are sliding. Investments are yet to pick up.

Amidst the doom and gloom, Nishit has identified several signs of an economic revival. He enumerates them in this month’s guest post.

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The Indian economy is showing signs of ‘green shoots’ and we are in the take off stage right now. Let us see the leading indicators to see if we are about to see good growth:

1. Fuel consumption has increased which is always a sign of pick up in industrial activity. Goods transport has increased.
2. The Automobile industry is showing signs of revival. When people have money to spend, they buy cars.
3. The Capital Goods space is showing good traction at the moment. Capital goods space always does well when industrial activity increases.
4. The IT industry is showing good results. It has been the sector employing maximum people in last 15 years. Affluence of the new IT middle class will lead to increase in consumption.
5. Low fuel prices mean that a major inflationary pressure is off. I see at least 100 basis points (1%) cut in interest rate over the next one year.
6. Low Interest regime is conducive to growth. Borrowings increase, industrial activity increases. It is a self-feeding economic cycle. The interest cycle has yet to bottom. The bottom of the rate cut cycle often coincides with a bull run taking place. In March 2009, the rates bottomed and the markets picked up.
7. The building blocks are in place for a super bull run for the next 5-8 years. This correction is the last buying. opportunity. I see a scenario similar to the one in 2002-2003. The rest is history.
8. History often is a roadmap for the future. With good governance, favourable economic conditions globally and conducive domestic growth factors, this is a Black Swan event.
9. Tax collection has increased. This means there is uniform tax collection. I would say increase the Service Tax t o 16% so all bear the burden and reduce Income Tax slabs, do away with exemptions, simplify the tax structure.

We all know what happens when a Black Swan event happens. Nifty may go down to 6800 to 7200, but eventually we are headed to 10500 minimum on the Nifty and over the next 10 years we may even touch 18000 to 20000 - which will be the end of the super cycle as per Elliot wave analysis. Nations take birth, grow, mature and fail. This is true for everything in life, the time span differs. India’s time is now. The next 10 years will be India’s golden age and the party is just about to begin.

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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)

Nifty Long Term Elliot Wave Counts

Those investors who are in a panic because Nifty has corrected for 2 straight sessions, and are worried that the index may face a huge fall – here is some good news.

Take a long-term view. The future doesn’t look that murky at all. In fact, it looks extremely bright.

For details, check out Nishit’s long term Elliott Wave counts here.

(Note: I am not a great fan of Elliott Wave theory because it seems too confusing and cumbersome in practice. But I do like long-term views, and Nishit’s post is definitely worth checking out.)

Is it a good time to enter RIL post results? – a guest post

RIL recently declared what appeared to be stellar Q2 and half-yearly results, with a $1 Billion profit during the quarter (which is more than the annual turnover of many listed companies). Why did the market react indifferently to the excellent numbers? A closer inspection of the figures paints a less rosy picture.

In this month’s guest post, Nishit looks at the RIL stock from both fundamental and technical points of view to help investors take an informed decision about what to do with a stock that has been a favourite of investors for many years.

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Reliance (RIL – CMP Rs 812) has come out with its half yearly results. Let us find out how this bellwether stock is faring. For RIL, the main sources of profits come from 3 segments: Refining, which contributes 80% of the top line; Petrochem, which is their old bread and butter business; and oil and gas business. Retail and Broadband businesses are still in nascent stages and are yet to generate any substantial profits.

Refining business is booming and gross refining margins (GRM) are almost $9.50 per barrel. This is a decent GRM, because of high oil prices. Typically, GRMs are 8-10% of the price of oil. However, GRM was lower than the year-ago quarter, though it was higher than Q1.

Gas business has hit a roadblock with Krishna Godavari basin not generating as much gas as was earlier expected or planned. The company has also got embroiled in a controversy with the government on cost allocation for exploration.

Petrochem business, which is the old solid business, has seen margin contraction. Other income contributed almost 31% to the profits. Other income is obtained by investing surplus cash in the financial markets. This is more like a treasury operation and the income generated is like that of a financial institution.

If RIL generates 31% income from financial investing, it means it has much surplus cash but very little idea of new businesses to invest in. To be fair to RIL, they are looking at broadband and content related to broadband (e.g. Network 18 rights issue). It is also doing a share buyback, extinguishing shares by buying them from the market.

So, those buying RIL shares are buying it on the bet that its Retail, broadband and content businesses may expand into something more substantial.

RIL’s share price will depend on the gas it generates from KG Basin and also any output from its recent Shale gas purchases. A fundamental buy on RIL would be for buying its future expansions. Those who trust the management and its promises can look at buying RIL. At a valuation of a P/E of 10-12 range, the fair price comes to Rs 610 to Rs 750.

Elliot Wave analysis:

The bottom which the stock hit in October 2008 was Rs 465. After that the stock hit a peak of Rs 1149. So, if we take a corrective A-B-C to the entire up move which terminated at 1614 in Jan 2008:

• A – 1614 – 465
• Ba – 465 – 1149
• Bb – 1149 – 681
• Bc - 681 - ??? (942, 1023 or 1149 can be targets); currently made a high of only Rs 881.

Bottomline: The future outlook for RIL is hazy and only those with an appetite for risk can venture to buy it.

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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).

Related Posts

1. Why rely on Reliance?

http://investmentsfordummieslikeme.blogspot.in/2009/01/why-rely-on-reliance.html

2. Why did Reliance announce a share buyback?

http://investmentsfordummieslikeme.blogspot.in/2012/01/why-did-reliance-announce-share-buyback.html