Stocks to Watch:
1) HDFC Bank-Sell
2) Dr. Reddy's-Sell
 | 5282.00 | ( 0.41 %) | 21.60 |  |
| 1 | 2 | 3 | ||
| Resistance | 5296.98 | 5311.97 | 5330.18 | |
| Support | 5263.78 | 5245.57 | 5230.58 | |
 | 17644.76 | ( 0.49 %) | 85.91 | | |
| 1 | 2 | 3 | |||
| Resistance | 17698.85 | 17752.94 | 17822.94 | ||
| Support | 17574.76 | 17504.76 | 17450.67 | ||
| FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| FII | 26-Mar-2010 | 3009.29 | 2418.39 | 590.9 |
| DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| DII | 26-Mar-2010 | 1329.37 | 1279.96 | 49.41 |
Indian equities tumbled last Monday. But they were not alone. Other global equity and commodity markets declined on that day too. And the reason…. hike in policy rates by Indian Central Bank. Just goes to show the growing clout of India in the global financial arena.
Market reaction to the policy rate hike scarcely lasted a day, as anticipated. But the truncated week witnessed subdued trading even as the bulls and bears battled it out in the derivative segment ahead of the expiry of March derivative contracts. There were pockets of wild activity in sectors such as the mid and small pharmaceuticals but the front-line stocks remained languid resulting in the Sensex ending with just 66 point weekly gain.
Derivative volumes reached record highs on the expiry day. The April derivative trading opens on a fairly heavy note with open interest already over Rs 88,000 crore. FIIs continued to be net buyers through the week though the domestic institutions were net sellers in three out of last four sessions.
With just three sessions to go for the end of the first quarter of 2010, let us quickly review the takeaways from the index moves in this period. January began on a bullish note with Sensex hitting the high of 17790 before it plunged to 15651 in mid-February. It has been a strong fight-back since then and stock prices are once more poised to test their January highs. The gains in the first quarter is however a measly 1 per cent with maximum gains at 1.8 per cent and maximum losses as 10.4 per cent in this period.
In our outlook for 2010 published on January 3, we had explained that "In e-wave terms, the rally from the March (2009) lows is developing into a zigzag pattern that has the first target between 17,800 and 18,200. Failure on the part of the Sensex to move beyond 18,500 in the first quarter of 2010 will corroborate this view. A terminal corrective that makes the index move between 14,000 and 18,000 for a few months is also possible in the initial months before a downward reversal. But investors ought to stay on their guard as long as the 18,500 level is not surpassed strongly. The more optimistic scenario is one of the C wave of the zigzag, unfurling with gusto to its maximum potential, to 20,772. "
The choppy sideways move witnessed since the beginning of this year has not brought any alteration to this outlook. The zigzag pattern terminated at the targeted 17800 and what is following could be another flat or triangle that takes index slightly higher from these levels but not too much. This would result in movement in the aforesaid range between 14,000 and 18,000 for a few more months. The view will turn bullish only on a strong close above 18500.
Optimism levels always surge as indices near the upper end of trading bands. Performance of other global indices makes a rally above the Sensex's January highs possible. But convergence of targets in the area between 17900 and 18000 makes it necessary that caution be exercised as the index nears this level.
The near-term trend in the Sensex is up. The index can attempt to move higher to 17877 or 17909 in the week ahead. But things could get choppy around these levels. Close above 17900 would be the cue for short-term investors to buy again. Next target is 18210. Supports for the week are at 17074 and 16906. Traders can buy on declines as long as the second support holds. Support below 16906 is 16427.
Nifty (5,282)
Nifty closed the week just whiskers short of its January peak. The near-term trend in the index is up but negative divergence in the 10-day rate of change oscillator and the 14-day relative strength index moving in to the overbought zone are signalling a slowdown in the momentum that can cause sudden reversals. The index could move higher to its former peak of 5310 or 5356 in the week ahead. Turbulence can be expected at these levels. Medium-term target on a strong close above 5350 is 5447.
Supports for the week ahead are at 5108 and 5057. Traders can hold their long positions only as long as the second support holds. Subsequent support for the index is at 4911.
Global cuesStocks rose towards weekend as European leaders agreed upon a bailout package for Greece. Surprisingly, the CBOE volatility index rose after recording the low of 16.2, to end the week 5 per cent higher. This implies that traders were slightly edgy as the major benchmarks recorded fresh 2010 highs. CRB index that tracks commodity prices declined over 2 per cent signalling the continuation of the medium-term down trend from January 2008 peak.
It was a good show by the Dow last week. Though the weekly gains were restricted to 1 per cent, the index closed at a new yearly high. This is the seventh positive close in the last eight weeks. However if this is the third leg of the flat formation from 9647 low, then it ought to end at 10918 or 11331. Since the first target was achieved last week, the index can ease a little lower now.
Some of the benchmarks such as FTSE 100, Nasdaq Composite, Philippines Composite Index and Thailand's SET closed strongly above the 61.8 per cent retracement of the previous bear market.
RIL moved to the intra week low of Rs 1,068 on Monday before inching higher in the next three sessions to close 1 per cent higher. The stock is moving sideways since June 2009 and an ascending triangle pattern is being formed on the weekly chart. This is a bullish continuation pattern and implies that a break-out above the upper boundary at Rs 1,200 will take the stock up Rs 1,540. However a strong close above Rs 1,200 is needed to confirm this view. Else the stock can continue to trudge sideways between Rs 850 and Rs 1,200.
The short term trend in the stock is up since the March 10 low of Rs 988. Traders holding long positions can continue to do so with the stop at Rs 1,056. Target above Rs 1,100 is Rs 1,108, Rs 1,120 and Rs 1,135.
State Bank of India (Rs 2,072.7)
SBI has been on the back-foot ever since it tested its previous peak of Rs 2,395 and the stock declined to
Rs 1,863 retracing 38.2 per cent of the up-move recorded between March and October 2009. This is a strong medium term support and investors with medium term perspective can hold the stock with stop at Rs 1,860. The stock has begun moving higher after hovering over this support for an extended period. Medium term targets are Rs 2,265 and Rs 2,500.
Immediate short-term target for the stock is Rs 2,120. Subsequent targets are Rs 2,195 and Rs 2,268. Investors with short-term trading perspective can buy the stock in declines with the stop at Rs 1,995. Subsequent supports are at Rs 1,975 and Rs 1,960.
Tata Steel (Rs 643.5)
Tata Steel turned wobbly after hitting the key intermediate term resistance at Rs 650 in the first week of January and declined to the low of Rs 520 in February. The stock has recouped all its losses since then and is once again nearing the resistance zone around Rs 650. Investors need to stay alert as long as this level is not surpassed emphatically. Reversal from here again can result in sideways move between Rs 520 and Rs 650 for few more months. The 200-day moving average at Rs 520 will be the key medium term trend deciding level.
The short-term view for Tata Steel is positive and the stock can rally to Rs 652 or Rs 667 in the near term. Stop for short-term traders can be at Rs 625.
Infosys (Rs 2,777.6)
The trend along all time-frames, long, medium and short term are currently up in Infosys Technologies. The peak of Rs 2,439 recorded in February 2007 cushioned the stock's decline in January this year and it is once more at new life-time high. Although the oscillators in the daily chart are in the overbought zone, there is no clear sell signal yet. Short-term investors should therefore hold their long positions with the stop at Rs 2,700.
Stop loss for medium term investors can be below the 50-day moving average at Rs 2,570. Next medium term target for the stock is Rs 2,916.
Consider setting long strangle in Nifty
Fourth-quarter earnings announcements will follow soon and with it the many upgrades and downgrades to stocks. That is to say, markets are likely to see higher volatility in the coming days than what it has seen in the recent past.
With option premiums appearing seemingly expensive, traders can consider setting a long strangle that helps play the market at lower costs.
Considering that technical indicators point to a breakout on either side (read technical outlook), we suggest traders to set the strangle by buying Nifty Apr 5,100 put, which closed at Rs 45 and Nifty Apr 5,300 call that ended the week at Rs 99.
The strategy will involve an initial debit of Rs 144 per lot.
You can stagger the purchase of the put and call depending on the market conditions to bring down the cost of the spread.
However, as the options involved in setting the long strangle are out-of-the-money, you will need a larger move in the index price (when compared to long straddles) to earn profits. In this case, your spread will become profitable only when the index breaches past 5,444 (5,300 + cost of spread) or trudges below 4,956 (5,100 - cost of spread) on expiry.
Nonetheless, if the index moves decisively past the strike price of the options purchased in the interim period, you can consider cutting the loss-making option position first while keeping the profitable one open.
That is to say, consider exiting the 5300 call if the market reverses lower or cut the 5100 put position if its moves significantly higher from the current levels.
Sizzling stocks: Valecha Engineering (Rs 147.8)
Valecha Engineering raced 18 per cent higher on Thursday and topped it with another 20 per cent gain on Friday. This upsurge has helped the stock break out of the sideways range between Rs 90 and Rs 125 within which it was moving since October 2009. The strong move above the upper boundary of this range implies that the third leg of the up-move from the March 2009 low could have begun. This move has the medium term targets of Rs 155 and Rs 195.
Since the stock faces strong intermediate term resistance around Rs 155, investors sitting on large gains can book some profits if the stock fails to move past this level. Those who wish to hold the stock for long-term can do so with the stop at Rs 85. Others can also buy the stock in declines with Rs 85 as stop.
Aegis Logistics (Rs 219.2)
This stock sizzled in the last two sessions to end the week 12.7 per cent higher. The uptrend that began in the first quarter of 2009 ended at Rs 241.8 in the first week of January. The correction from this peak was however extremely shallow and halted above the medium term trend line at Rs 190. The strong reversal recorded last week could signal the end of this correction and the beginning of the next leg of the medium term up-move that can take the stock higher to the medium term target of Rs 274.
The long-term outlook will however turn positive only on a close above this level. Investors with a medium term perspective can hold the stock as long as it trades above Rs 175. In the short-term, the stock can move on to Rs 232 or Rs 242. Stop for short-term investors can be at Rs 205. –
Gold Exchange Traded Funds — Dwindling returns, but stay invested
After delivering an exceptional 25 per cent return in 2009, Gold Exchange Traded Funds (ETF) have got off to a bad start this year.
The year-to-date returns on Gold ETFs stand at a negative 2.8 per cent and one-year returns on them have been trimmed to 6.8 per cent.
Though this single-digit gain is closer to the long-term return profile for gold, it is well below the stellar returns managed by gold over the past two years.
Gold Exchange Traded Funds have turned out to be an underperforming asset class over the past year. Equity funds were the best asset to own, sporting a near 100 per cent one-year gain.
Why poor returns
Why have Gold Exchange Traded Funds put up such an uninspiring show this year?
Part of the answer, in fact, lies in the stunning revival wrought by other asset classes, including stocks.
The string of unexpectedly good macro economic indicators from across the world, strengthening hopes of a V-shaped recovery and the sooner-than-expected turnaround in both stock and credit markets have all fuelled a fresh round of risk-taking by investors, reducing demand for a safe haven such as gold.
A weakening dollar and worries about its demise had also helped support gold prices through 2009; but dollar direction too has taken a sudden about-turn.
The Dollar Index has gained 5.1 per cent in 2010 after losing over 4 per cent in 2009, undermining gold prices.
Synchronised governmental moves to forge an exit from stimulus measures and to get back to lower fiscal deficits too will do much to weaken the "paper-money-is-losing-its-value" argument.
All these factors were instrumental in global gold prices weakening by about one per cent so far this year.
Rupee factor
Investors in India-listed Gold ETFs have made even poorer returns on their holdings due to the strengthening rupee.
Any appreciation in the value of the rupee against the dollar cuts the price gains for domestic Gold Exchange Traded Funds, as they own dollar denominated assets.
Feeder funds that invest in gold mining stocks have, true to form, underperformed Gold ETFs this year after strongly outpacing them last year. The DSP Blackrock World Gold Fund and AIG World Gold Fund had delivered returns of 42 per cent and 55 per cent, respectively, in 2009, but saw their NAVs decline seven per cent and four per cent, respectively, so far this year.
Gold mining stocks have always been a high-beta exposure to underlying gold prices (meaning they outpace Gold ETFs both during up and down phases) and this has played out once again.
Hang on
So, with many of the factors that had been propping up gold prices over the past two years evaporating, should investors hold Gold ETFs or Gold Mining Funds? They should.
The key purpose in holding gold-linked assets in the portfolio is to ensure diversification — they carry a low correlation with assets such as stocks.
The tendency of Gold ETFs to deliver poor returns when stocks do well, in fact, reinforces their value as good portfolio diversifiers.
The key argument for holding gold in your portfolio is in fact that gold does well when other assets don't. Therefore, if and when the tables turn and stocks go into a corrective mode, gold investments may start delivering better returns once again.
Remaining invested in gold through its ups and downs may be the best way for investors to ensure that they can prepare for such a change in fortunes, if at all it occurs.
Top-down or bottom-up?
Are you going to take a top-down approach to identify an investment or the bottom-up way? How about trying a blend of the two?
For investors looking to take a plunge into the stock markets, making the choices is the most tricky part. The Mumbai Stock Exchange features 6000-odd listed companies and the National Stock Exchange nearly 2000. Then, there are also the host of new debutants who are trying to lure you to bet on their initial public offerings.
How then do you actually pick out a stock from such a bewildering line-up of choices? Well, seasoned fund managers use one of two approaches to home in on the businesses they bet on- Top-down investing or Bottom-up investing.
Quite a few managers also adopt a mix-and-match of the two approaches. But how do the two approaches actually work? Here's an example that should clarify the picture:
Consider an imaginary country Wunderland, whose economy is soaring following the advent of free market capitalism.
This economy is chugging along at 10 percent with demand for things such as steel, cars and so forth, growing at multiples of the general economy.
You identify the automobile sector as an attractive bet based on its growth rate and underlying dynamics such as the number of market participants, potential client base, etc.
You then identify two attractive candidates in the industry based on financial and operational prudence. Then you decide to split the cash and buy both. As an investor, you sit back and wait to ride the growth wave.
Another investor holidaying on the beaches of Wunderland sees a rather attractive looking car at an equally attractive price. He then decides to investigate further and begins to dig into the company making the car.
This company, in addition to being immensely profitable, is run by talented individuals who design attractive, quality cars while keeping costs in check. They do all this without incurring any serious borrowing.
This investor also chances on a report that chronicles the wonderful opportunities of Wunderland and the potential of the nascent automobile industry. He then clears out savings and bets on this car maker on the Wunderland Stock Exchange.
Both of the above scenarios, when successful, result in an identical outcome: A pot load of money for betting on Wunderland's car companies. However, both investment decisions came from different rationale — one based on a bet of a surging economy whose inhabitants will consume more automobiles; identifying how general prosperity and growth trickle down to the bottom line of a car company.
The second is based on the confidence placed in a car company whose exemplary products and operational prudence will allow its bottom line to thrive in a prosperous economy. The first rationale is referred to as the top-down approach and the second as the bottom-up approach to investing.
Top-down
The top-down approach traditionally involves identifying investment opportunities or themes based on macroeconomic indicators.
For example, GDP growth or industrial growth are metrics to identify the rate at which an economy is growing. A theme or sector is identified among the various sub-sectors which are powering growth.
In a fast growing developing economy such as China or India, infrastructure, steel, automobiles, industrial equipment are among the sectors that exhibit high growth as the governments spends to develop the economy.
Following this, companies that are beneficiaries of participation in this growth are identified and analysed.
The investors may then choose a company, index or fund to invest in which will enable them to participate in the growth of the identified asset.
Other metrics that could be considered for top-down analysis include strength of the currency, perception of policy making, etc. The downside of a top-down approach is the speed with which information moves in the modern day markets.
This may ensure that a company that benefits from growth may already have priced in the growth information much before it is reflected in soon-to-be-released GDP or industrial data.
Bottom-up
The bottom-up approach first involves identifying an 'intrinsically' superior asset or company. Bottom-up analysis places emphasis on understanding the factors that lend to 'intrinsic' superiority.
The factors may be financial, operational or managerial but it is an advantage that stems from and is unique to the company.
However, bottom-up bets have their downside as well. In adverse economic conditions, regardless of how competent a company is, it will suffer when the economy suffers. When consumption suffers, no amount of conviction-driven bottom-up analysis can help.
Holistic Viewpoint
Interestingly, most modern investors use a method that incorporates the best of both worlds.
Top-down analysis is employed to gauge the operating environment in terms of government policy, social and economic stability, national economic health, public spending, and reforms, among other tangible and intangible metrics.
Bottom-up analysis provides a perspective on individual participants in the economy, such as how well does a company operate relative to its domestic and international peers?
How efficient is a company with its capital? How sustainable are its profit margins? These kinds of questions provide a micro picture.
Both the perspectives, when viewed together, provide a more coherent context and holistic viewpoint on the price paid for an asset.
How to invest in dividend stocks
If dividends and capital gains are the two components of return to an investor, how much do Indian investors value dividends? Not much, it seems.
Indian investors tend to put their money on stocks more for their ability to deliver capital gains than for their yearly dividend payouts. This is also justified by the fact the Indian market as a whole doesn't deliver much of a return by way of dividend.
The current dividend yield for the constituents of the Nifty index (dividends/market price) is less than 1 per cent. Nevertheless, investing for dividends does make sense for investors due to a few reasons. If last year's evidence is anything to go by, dividend payouts tend to be less volatile than company profits, which decide valuations. While the market as a whole may not sport a high dividend yield, investors can still bet on the few stocks that do. Here's an analysis of the trends in dividend payouts of Indian companies and dividend yield stocks, based on a study of the CNX 500 stocks.
Less volatile
Despite 2008-09 being one of the worst years in recent times for the Indian economy and its companies, the latter did not materially cut back on dividend payouts. Even as the overall net profit of the CNX 500 companies dipped by 6 per cent between 2007-08 and 2008-09, their total dividend payout saw only a 2 per cent dip, falling to Rs 52,500 crore from the Rs 53,360 crore in FY08.
The overall dividend payout ratio actually edged up a little from 24 to 24.8 per cent, as companies dug deeper into their pockets to pay dividends. The number of companies that declared dividends in 2008-09 was 364, just 17 short of the previous year.
Quite a few of the companies that paid dividends last year maintained their dividend rates despite a fall in net profits — Amtek India, Godrej Industries, Jindal Saw, Nirma and Tata Chemicals being some instances. Tata Steel maintained its dividend rate at 160 per cent despite a small 10 per cent growth in its standalone profits. The message to investors is that dividend payouts may be less volatile than per-share earnings. During a downturn, this makes it preferable for investors to bet on dividend paying companies rather than non dividend payers.
Consistent payers
Investors looking for consistent dividend payers over the long term however may not have too many stocks to choose from. Scanning through the CNX 500 companies throws up a few names — Neyveli Lignite, Chambal Fertilisers, Hero Honda Motors, Geometric, Havells India and Elder Pharma.
The trick in identifying consistent dividend-paying companies seems to be low payout ratio. Most companies with a regular payout appear to have set a record of consistency by paying a limited share of profits as dividends; payout ratio has been less than 30 per cent in eleven of these companies.
Elder Pharma has been declaring 25 per cent dividend every year in the last five years. But this is just 9-12 per cent of its profits. Geometric has been declaring 40 per cent dividends which are again just 10-20 per cent of its profits. A low payout ratio probably allows dividend-paying companies to maintain the payments even through ups and downs in earnings over the years.
Higher stock valuation?
If dividends and capital gains are the two components of return to an investor, how much do Indian investors value dividends? Not much, it seems. The market doesn't actually give higher valuation to companies that pay out consistent or high dividends. Hero Honda Motors with an annual dividend Rs 20 per share, for example, has never traded at valuations higher than TVS Motor (whose dividends have fallen from Rs 1.30 per share to 70 paise per share) in the last five years.
Tata Chemicals (dividend per share risen to Rs 9/share from Rs 6.5 five years back) has been trading at lower valuations compared to RCF (dividend per share Rs 1.70-1.20); State Bank of India too (dividend per share up from Rs 12.5 to Rs 29) has been trading at a lower PE than HDFC Bank (dividend per share Rs 10, up from Rs 4.5).
The markets also don't seem to mark down a stock's valuations when dividends are cut or don't materialise for a particular year. For example, JSW Steel's dividends dropped sharper than that of SAIL in FY09 but the market continued to give it a higher PE than the latter.
Given that valuations are a function of a company's perceived "growth" potential, markets appear to value companies that plough back profits into the business better than those that pay out dividends. This means that if you are a dividend seeking investor, you may actually find your stocks trading at a valuation discount to peers.
Dividend yield stocks
Turning from dividend payouts to dividend yield (dividends as a proportion of stock price), though the index's average yield is low, there are a handful of stocks in the CNX 500 that have consistently delivered high yields to investors; with dividends rising in proportion to the market price of the share.
Some stocks that have consistently delivered a 3-7 per cent yield every year over the last five years are Supreme Industries, Karur Vysya Bank, Wyeth, Nava Bharat Ventures, Supreme Petrochemicals, LIC Housing Finance and Andhra Bank. In some of these cases, the high dividend yield made up for the capital loss in the stock during the 2008 meltdown.
In the case of Wyeth for example, dividends added 8.17 per cent (Rs 37/share) in FY09 to the returns of investors who had bought the share a year ago. This almost made up for the loss in the value of the share (Rs 38/share) in that period on crash in the stock market. However, investors basing their decision mainly on a stock's historic dividend to get at the yield may at times be misled by companies cutting back on dividends or reducing payouts after exceptional years. Someone who invested in Indo Rama Synthetics in March 2008 looking at its attractive 13.5 per cent dividend yield was likely to have been disappointed the following year. With the company reporting a loss of over Rs 90 crore on a fall in sales and spike in interest cost the next, it didn't declare dividends at all.
In the case of Monsanto India, the company's one-off dividends of Rs 297/share in 2007-08 lifted the dividend 'yield' to very high levels; but dividends normalised the very next year to Rs 25/share. Another instance of a company making a large payout due to one-time income was EID Parry which declared a 1000 per cent dividend in FY09 out of windfall profits on sale of investments. This however may not be the case in the current year.
An unusually high dividend yield may also be a direct reflection of the low valuations that the market is willing to grant a particular stock due to uncertainties surrounding the business.
Findings so far suggest three key takeaways for dividend seeking investors:
Dividends for the more consistent companies may be less volatile than their profits;
Look for a low payout ratio if you seek consistent dividends; and
Beware of one-off payments while determining yield.
Finally, are there any specific sectors that investors can look to, to unearth high dividend yield stocks? Investors though don't have too many choices. But fertiliser makers and banks seem to figure more often on the list of dividend yielding stocks.
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Arvind Parekh+ 91 98432 32381
