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| *LTP stands for Last Traded Price as on Friday, August 20, 2010 4:04:15 PM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#1R1 stands for Resistance level 1 @1S1 stands for Support level 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| #2R2 stands for Resistance level 2 @2S2 stands for Support level 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#3R3 stands for Resistance level 3 @3S3 stands for Support level 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The levels given above are with respect to previous closing price on the NSE / BSE. |
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| Corporate News Headline | |
| • | Jindal Steel and Power said it has resumed work on its USD 2.1 bn project in Bolivia after the South American country allocated about 3,000 acres of land for the venture. (BS) |
| • | Bharat Petroleum Corporation said its exploration arm, Bharat PetroResources, has entered into an agreement with Australia's Norwest Energy to pick up a stake in two shale gas blocks in the Perth Basin. (BS) |
| • | ABB said it has opened a wind power generator factory in Vadodara, fourth such plant in India, to meet both domestic and overseas requirement of the equipment. (BS) |
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| Economic and Political Headline | |
| • | Country's foreign exchange reserves declined by USD 4.56 bn to USD 282.79 bn for the week ended August 13, as against USD 287.35 bn the previous week due to a heavy dent in foreign currency assets. Foreign currency assets, which is a major component of the country's foreign exchange reserves, tanked by USD 4.49 bn to USD 256.59 bn, against the previous week's USD 261.07 bn, the Reserve Bank of India said in its weekly data released. (BS) |
| • | France's government cut its forecast for economic growth next year as President Nicolas Sarkozy prepares for the biggest budget squeeze in at least two decades. The euro area's second-largest economy will expand 2% in 2011, instead of the 2.5% previously predicted, Sarkozy's office said in an emailed statement. (Bloomberg) |
| • | Mexico's central bank held its benchmark interest rate unchanged for a record 12th straight meeting, saying inflation will remain within forecasts even as the economy grew the most in a decade in the second quarter. The bank's five-member board, led by Governor Agustin Carstens, kept the overnight rate at 4.5%. (Bloomberg) |
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| Buy / Sell (Aug 20, 2010) | |||||||
| Buy | Sell | Net | |||||
| FII | 2611.15 | 1948.29 | + 662.86 | ||||
| DII | 1121.91 | 1224.07 | - 102.16 | ||||
The Sensex continued to befuddle all by reversing higher mid-week to record a new 30-month high despite the continued onslaught of negative economic data from overseas. Foreign institutional investors are touted to be the perpetrators of this rally with their incessant purchases. But a look at other global markets that went up last week, perhaps again with FII support, throws up an interesting trend.
Markets in developed countries drooped even as stocks in emerging Asian markets such as in Malaysia, Philippines, Thailand and Indonesia also closed at multi-year highs last week. While this suggests that global funds are turning their eyes towards high growth economies to earn better returns; the 8 per cent spike in Sri-Lankan All Share Index and 4 per cent spike in Slovakia's SAX Index last week is disquieting - a sign that the bottom of the barrel is being scraped.
Frenzied action in some long-forgotten small-cap stocks in our market also suggests the same. Activity in derivative segment is also getting frenetic with the turnover crossing Rs 1 lakh crore on three days last week. Open interest has risen to highest-ever level, nudging the Rs 2 lakh crore mark. Highest component of this figure is Nifty put options at around Rs 60,000 crore. Stock futures come second at Rs 53,000 crore. This sets the stage for an exciting expiry to the August series.
The Sensex closed 234 points higher last week, edging close to the 18,500 mark. It does qualify as a minor break-out. But the fact that many such breakouts have fizzled out within a couple of weeks in recent history, denotes that not too much can be read in to this move. The 10-day rate of change oscillator that is diverging negatively since mid-June is an apt indicator of the fact that the current up-move lacks momentum.
The medium-term trend in Sensex stay remains sideways with positive bias. We are at the ceiling of this medium-term range and it is possible that we have a small break-out before the index pulls back within the range (15,500 and 18,500). We stay with the first medium-term target for the up-move from May lows between 18,300 and 18,600 and the next target around 19,300. A close below 17,395 is required to signal that the index is on its way down towards the lower boundary.
In the near-term too, the index is moving sideways forming higher peaks and troughs since July 14. This denotes a bullish undercurrent. However, there is likely to be strong resistance in the zone between 18,500 and 18,600 and investors can take some money off the table in this band. If this zone is surpassed, subsequent targets are 18,798 and 19,275. Close below 18,000 is needed to turn the short-term view negative.
A bumpy ride is expected for investors in the week ahead and the index is likely to gyrate between 18,000 and 18,600. Upper targets for the week could be 18,513 and 18,581. Move beyond 18,600 due to a bout of short-covering can take the index to 18,762. Supports will be at 18,200 and 18,000.
Nifty (5,530.6)
The Nifty too rose to our short-term resistance level of 5,550 towards weekend and closed just a little lower. The near term trend in the index stays positive but the expiry in the derivative section could usher in volatility and result in strong moves in either direction. Upper targets for the short-term are 5,580, 5,608 and 5,660. Supports for this period are at 5,461 and 5,408. Traders should desist from initiating fresh longs on a close below the first support.
We have a slew of medium-term targets converging in the zone between 5,550 and 5,600 that makes it very unlikely that the index can get past this zone just yet. We maintain the target of 5,780 on a strong move past 5,600. Medium-term outlook will turn negative only on a close below 5,225.
Global CuesGlobal equities moved lower last week and most benchmarks ended the second consecutive week in the red. CBOE VIX, the investors' fear gauge, whipsawed through the week and finally ended on a flat note.
This index reversed lower from the intra-week peak of 28.1 that is the key short-term resistance. Close above this level will usher in a more prolonged downtrend in US equities.
Weakness in equities is resulting in funds flowing in to commodities. CRB index that tracks the movement of commodity prices is once more close to the peak recorded in January this year. DJ Euro STOXX 50 closed over 2 per cent lower implying that the medium-term downtrend from the April peak continues to be in force in this index. Indices such as the FTSE and the DAX that were showing strength over the past month also reversed lower last week.
It was a week of sharp swings in both directions for the Dow and the index finally ended in the red. Key near term support for the index is at 10,000. Since this is also a psychological level the down-move can intensify if the index penetrates this level emphatically.
RIL marked an intra-week low of Rs 959 and bounced up advancing Rs 9 late in the week. The stock almost declined to our first support level of Rs 957 and leaped up slightly. As the stock failed to move below Rs 957, it has signalled caution, as we mentioned in the previous week. Moreover, the daily relative strength index has displayed a positive divergence triggering near-term trend reversal. However, to confirm this, the stock has to move above Rs 1,025, which is the 50 per cent fibonacci retracement level of the prior down move from June. Short-term traders can desist trading in the stock as long as it trades in the range between Rs 960 and Rs 1,010. Key support and resistance for the stock are at Rs 936 and Rs 1,030 respectively.
Medium-term trend is down for the stock. Strong weekly close above Rs 1,050 will mitigate this downtrend. In that case, it can climb to Rs 1,090. On the other hand, a decline to Rs 950 and then to Rs 920 is in the offing.
State Bank of India (Rs 2,783.6)
SBI retreated 2 per cent in the previous week. In the near-term, the stock can move sideways in the band between Rs 2,750 and Rs 2,850. Short-term traders should trade cautiously as long as the stock remains within this range. A fall below Rs 2,750 will tow the stock down to Rs 2,700 or Rs 2,650 in the short-term. In that scenario, traders can initiate short position with stop-loss at Rs 2,780 levels. The key resistances for the ensuing week are at Rs 2,850 and Rs 2,900. Medium-term trend continues to be up and investors with this time horizon can stay invested with stop-loss at Rs 2,350.
Tata Steel (Rs 520.2)The stock declined Rs 6.8 last week, amid volatile sessions. It is moving sideways between Rs 510 and Rs 540. Short-term traders can initiate fresh short position on a decline below its 50-day moving average positioned around Rs 510 with a stop at Rs 520. Short-term targets are 500 and Rs 490. Resistances for the week are at Rs 540 and Rs 564. We reiterate that its medium-term trend is down since its April 2010 peak of Rs 701. Medium-term supports for the counter is at Rs 470 and Rs 450.
The stock slipped marginally previous week by declining Rs 11. It consolidated sideways in line with our prior expectation, in the zone between Rs 2,730 and Rs 2,830. We re-affirm that a fall below Rs 2,730 will pull the stock lower to Rs 2,700 with the next support at Rs 2,675 in the short-term. Key resistance for the week are at Rs 2,800 and Rs 2,830. Medium-term investors can remain invested in the stock with stop-loss at Rs 2,600.
Sizzling Stocks: Ranbaxy (Rs 492.6)
Taking support at Rs 440, Ranbaxy turned red-hot and witnessed a spectacular rally over the week by gaining 11 per cent. There has been an increase in volumes over the past four trading sessions. The stock breached its 200-day moving average on Wednesday and its key medium-term resistance around Rs 480 on Friday. It appears to have resumed its intermediate-term uptrend that has been in place since March 2009 low of Rs 133.
The stock has the potential to prolong its ongoing rally until it encounters resistance at the Rs 520-530 band. As this resistance band is a significant long-term resistance, the stock may face some difficulty in surpassing it in first attempt. On a strong close above Rs 530, the stock can move higher to Rs 570 in the medium-term. Immediate key supports are pegged at Rs 465 and Rs 440. Long-term key support is at Rs 400.
The stock zoomed 14 per cent last week, accompanied by good volume. After finding support at Rs 1,260 in early June, the stock recommenced its long-term uptrend. It is hovering well above its 21 and 50-day moving averages and testing intermediate-term resistance in the range between Rs 1,825 and Rs 1,856. Presence of key resistance coupled with the daily relative strength featuring in the overbought territory imply short-term cautiousness. Failure to climb past this resistance will drag the stock lower to immediate support at Rs 1,700 or Rs 1,600 in the short-term. However, a decisive move above Rs 1,856 will lift the stock to Rs 1,900. —
Nifty calendar spread
| Index strategy. |
With current month derivative contracts slated for expiry in the coming week, trading in F&O could be ridden with high risks. While it is best to stay away from trading this week, traders with a penchant for risk can consider setting a calendar spread on Nifty. This can be done by selling Nifty Aug 5,500 call (trading at Rs 42) and buying Nifty Sep 5,600 call (trading at Rs 68). The spread will entail an initial cost of Rs 26 a share. Traders can also consider buying Nifty Sep 5,500 call instead (closed at Rs 122). This, however, would peg up the initial cost to Rs 80 a share.
Tweak the costs lower by timing the transactions depending on how the market fares on Monday. For instance, consider buying the next month long option first if the market opens weak, or sell the current month option first on a firm opening.
Overall, while the short leg of this spread will benefit from the fading time value of money, the long leg would benefit from the expected uptrend in the index. This spread will help you play the time value favourably and at the same time lower the cost of buying the second long option.
Note that this strategy enjoys a limited risk and high reward potential. Limited risk, because the sold option is backed by the long option in the far month; high reward as returns would swell if the market moves up as expected. However, on the downside, if the index makes an adverse move, and starts to correct from current levels, you will be risking the net debit paid while setting the spread. Therefore, if the index moves lower before the expiry, though you may be able to pocket the premium of the sold option, the long option will stand the risk of turning out of money.
After the expiry of the current month contract, keep the long position open as long as the index trades above 5,500. Close the position on a decisive move below it.
How to play Cairn news
| Stock strategy. |
Cairn India: The stock turned volatile recently after Vedanta Resources said it would acquire 51-60 per cent in it for $8.5 billion to $9.6 billion. The indication of Rs 405 a share (which includes a non-compete fee of Rs 50) means the open offer for Cairn India shareholders will come at Rs 355.
The outlook remains positive for the stock. Cairn India's immediate resistance appears at Rs 358 and the support at Rs 338. The stock could reach as high as Rs 395 and only a close below Rs 295 would reverse the outlook. Difference scenarios
If due to shareholders' activism, Vedanta announces an open offer at Rs 405 a share, the stock should surge to that level. However, if the deal fails, the stock should take its natural direction. As the crude oil price has fallen almost 10 per cent to around $74 from its peak, the Cairn India stock should also follow suit.
However, if Vedanta sticks to its current decision of offering Rs 355 a share, (or the decision is delayed), the stock would continue hover around current levels.
F&O pointers: The Cairn India futures (market lot 1,000) witnessed a rollover of 34 per cent. The Cairn India September futures is quoting lower at Rs 346.2, indicating long rollovers. Both calls and puts witnessed addition of open interest. This suggests that it could hover at current levels.
Strategy: Traders could consider long straddle on Cairn India by buying September 340-strike of call and put. The 340 call closed at Rs 13 and the put at Rs 6.7, thus entailing an initial outgo of Rs 19.7/contract.
If the first scenario pans out, then the stock should surge to around Rs 40; the call price would be over Rs 50 and put would be near zero; if the deal fails through, then the stock could slip to around Rs 315-320 (assuming a 10 per cent correction as has happened to the crude oil price). This will push the put price above Rs 25-30 and call to near zero. The risk is if the stock remains at the current level, the options' premiums would lose value due to time decaying.
The Indian asset management industry appears to be opening up to new product ideas. A recent offering is a fundamentally-indexed Nifty ETF.
This article explains the concept of fundamental indexing and then shows how investors can benefit from such products. It also discusses whether such products fit inside the core-satellite portfolio.
Fundamental Indexing
Proponents of fundamental indexing argue that market-cap weighted index has an inherent flaw. The argument is simple. Market participants typically overreact to information. In an uptrending market, stocks move up more than is warranted by their estimated intrinsic value. Market-cap weighted index, hence, overweights over-valued stocks and underweights under-valued stocks. Such exposure is expected to drag portfolio returns.
Rob Arnott and his US-based firm, Research Affiliates, argue that fundamental indexing tidies this problem by considering fundamental variables such as book value and earnings. Research Affiliates used several metrics including book value and trailing five-year average cash flow, ranked each stock based on its relative metric weight to create the index.
Their article, published in 2005, has since led to intense debate in the asset management industry as to whether fundamentally-weighted index really scores over the market-cap weighted index.
We skirt this issue here and instead discuss if investors can benefit from taking exposure to funds benchmarked to fundamentally-weighted index.
Value tilts?
MOSt shares M 50 are benchmarked to fundamentally-weighted index, constructed with the Nifty constituents. Suffice it to know that fundamentally-weighted indices carry value tilt. This means that the index has a bias towards high-yield stocks — stocks that have low price-to-cash flow multiple and high dividend yield. This offers an opportunity for investors to take exposure to large-cap value-style investment.
The question is: Is value-style investment optimal? The answer would depend on the investor psychographics (investor characteristics and behaviour) - whether an investor is confident or anxious about her decisions and whether she is careful or hasty in her investment actions.
Typically, value-style investment performs well after market recovers from asset price crash. Empirical evidence shows that value stocks did well after the market recovered from the 2008 crash.
While there may not be a strong statistical relationship between VIX (Volatility Index) and style investing, it is true that volatility declines when investors are confident. And confident investors typically favour growth stocks over value stocks. By logical extension, it may be, perhaps, worthwhile considering value-style investing when VIX moves up. Investors have to consider if fundamentally-weighted index products fit within the core-satellite portfolio. To recap, core portfolio is typically created with passive equity and bond exposure. The satellite portfolio is constructed using alpha-generating strategies.
The value-tilt that fundamental indexing offers makes ETFs benchmarked to such indices suitable for the passive core. It is, of course, the investors' decision to choose fundamentally-weighted or cap-weighted index for their passive core.
It would be, however, sub-optimal for investors to take exposure to both market-cap weighted fund and fundamentally-weighted ETF inside the core portfolio. This is because the growth bias of the market-cap weighted index and the value tilt of the fundamentally-weighted ETF would prevent the portfolio from realizing its optimal upside potential when asset prices climb up.
Conclusion
We wish to leave the reader will three thoughts to consider before investing. One, the product should complement other assets within the existing portfolio. Two, management fees and expenses should be comparable to similar products in the market. And three, the benchmark (constituents and weights) should be transparent for easy performance evaluation.
There is nothing defensive about the entire IT pack, going by the stupendous run they have had from March 2009 lows. Even on a one-year basis, the BSE IT index is among the top gainers having delivered over 40 percent returns in this period, with the top-tier IT companies reaching multi-year highs in terms of valuations. The BSE IT itself trades at 24 times trailing earnings, higher than the Sensex or the Nifty.
The revival was not restricted to client spends in the US and the key vertical of BFSI which is normally good news for the diversified IT pack – large and mid-tier, even niche companies focussed on manufacturing, telecom and automotive gained significantly from the pent up demand. Volumes (person-months billed) has revived for companies across board, a fact cheered by the markets.
Infosys, TCS, Wipro and HCL Technologies have delivered 35-80 percent returns over the past one year and trade at PE multiple range of 20-27 times, which is the level they enjoyed in 2007. TCS and HCL have been key outperformers over the past one-year.
But with wage hikes of 10-15 percent, a rising tax-incidence and the challenging environment in Europe (and the Euro losing ground against other currencies) mean that margin pressures exist. In this context valuations look to be in the fair to expensive zone.
Among the others in the large sized pack, Patni Computer has delivered stellar returns, while Tech Mahindra has fallen from its year-ago levels.
Mid-cap stocks still trade at a substantial discount to their larger peers at 10-15 times earnings as markets still tread cautiously in assigning them any premium. Oracle Financial , Mphasis and Rolta India have all underperformed.
Weekend Platter Report on http://www.indiabulls.com/securities/research/equity_analysis_report/Special_Report_PDF/WP_Aug%2020.pdf &
http://www.indiabulls.com/securities/mailermis/weekly-reports/weekend-platter-20Aug2010.aspx
Funds from the IPO could help the company move into the profit zone in a couple of years.
Investors with a three-four-year perspective can subscribe to the initial public offerof Gujarat Pipavav Port (GPPL). The strong parentage of A.P Moller-Maersk group, strategic location and fast growth in volumes, albeit on a low base are positives for this private port. The port is located on the main maritime trade routes and provides a good alternative for ships seeking to anchor at Mumbai.
While GPPL is yet to turn in profits at the net level, it has been profitable at the operational level for a few years now. Higher borrowing costs and initial cost of ramping up operations have resulted in losses. As the funds from the IPO would significantly reduce debt, the company could well move into the profit zone in a couple of years.
Valuations
At the offer price of Rs 42-48, the price discounts the post-issue book value by 2.3-2.5 times. Valuation for Mundra Port and SEZ is nine times (March 2010). GPPL's Enterprise value/EBITDA at about 30-33 times appears a little expensive given that Mundra Port enjoys only a multiple of 35.
However, this ratio could improve significantly for GPPL, once the railway traffic guarantee shortfall payment reduces or vanishes with increase in volume.
Investors need to note that GPPL has a long way to go before it can scale up to Mundra Port's size. Mundra Port handled 21 million tonnes of bulk cargo in FY-10 as against 3.4 million tonnes by GPPL for the year ending December 2009. In terms of revenue, Mundra Port's Rs 1,280 crore (FY-10) is close to six times that of GPPL's.
Mundra's financial metrics therefore suggest that it is a superior play, with the advantage of scale. GPPL, given the backing of the promoter and a small base, may nevertheless grow at a faster pace, provided global trade does not witness another sharp slump.
Company and the offer
GPPL, a non-major, all-weather private port located in the Saurashtra region of Gujarat is promoted by the Netherlands-based APM Terminals, part of the A.P. Moller-Maersk Group, among the largest container terminal operators in the world. The offer consists of a fresh issue of Rs 500 crore and a Rs 50-crore offer for sale by institutional investors. The company's market capitalisation (at the offer price) would be about Rs 2,000 crore.
Demand for non-major ports: Most of the country's major ports have been operating at over 100 per cent capacity utilisation in FY-2010, thus providing ample opportunities for traffic spill-over into non-major ports. Not falling under the purview of the Tariff Authority that regulates major ports, the other ports also have the advantage of flexible pricing. The prospect for Western region ports is also supported by the fact that over 60 per cent of the total cargo (CRISIL Research 2010) is handled in the Western coast of India. Added to this, operator-friendly royalty rates and easier access to vast land has made Gujarat a lucrative region for port developers.
Key positives
The company's strong parentage helps it to develop business with international shipping lines such as Maersk Lines and Safmarine Container Lines, who have made GPPL their exclusive port of call in the state of Gujarat. As a result, GPPL's bulk cargo has more than doubled in the last two years to 3.37 million tonnes. Nevertheless, container cargo accounts for a higher proportion of the company's present cargo, with parent APM being among the leading container operators in the world.
Revenues from LPG cargo and higher volumes from coal bulk cargo may be some of the key accelerators for revenue in the coming years. The Pipavav region is set to see power capacity additions by Videocon Industries, Visa Power, Torrent Power in addition toGSPC's plant. With a good proportion of coal sourced from overseas mines, the port would see significant coal imports. Coal currently accounts for 45 per cent of the port's bulk cargo. GPPL provides LPG cargo services for Aegis Gas. As the company was relocating its LPG cargo jetty, it did not derive any revenue between July 2007 and March 2010 and was instead paying some compensation to the client. This segment may now see lower expenses besides revenue contributions. The relocation also makes the company better placed to take up clients and provide dedicated pipelines.
GPPL has connectivity to the National highways and has a 269 km dedicated railway link, with double stack container rake service, through a venture with the Railways. This link also completes services provided for customers.
Financials
Pipavav's operating profits grew 17 per cent compounded annually over the last three years to Rs 49 crore for the year ending December 2009; the growth has not been attractive for two reasons — one, the slowdown in 2008 and partly in 2009, hit revenues. Two, the company was paying/providing very high (Rs 144 crore so far) penalty as a result of not meeting the traffic volume obligation towards the Western Railways. This amount has now dwindled and may become nil as volumes begin to surpass the minimum guaranteed amount. Interest costs, which were an alarming 50 per cent of total revenues, may also decline by one-third. Debt-equity ratio too would reduce to less than 1.5 after the offer from over three (pre-IPO).
A key limitation for GPPL is that unlike Mundra Port, Pipavav does not have exclusive corporate agreements (barring UltraTech Cement) for usage of port although a number of big names transact with them. However, this may be key to having more sustainable revenue streams.
*Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES.
Arvind Parekh
+ 91 98432 32381
