Sensex (20,032.3)
The month of October acted true to its notorious reputation and rudely yanked back the Sensex just 2 per cent short of its life-time high. But a serious crash was averted thanks to the unshakeable belief of overseas investors in the 'India story'. The colossal success of Coal India IPO further added to the sheen of indomitability that is currently enveloping our stock market.
Pre-Diwali week will be dominated by the monetary policies of the US Federal Reserve and the Reserve Bank of India. The truncated week will also be influenced by corporate earnings even as market participants take some time off to participate in the festivities.
Volumes in the derivative segment reached record levels as October derivative series rolled in to expiry; it reached an all-time high of Rs 2.5 lakh crore on Thursday. The November series begins on a very heavy note above Rs 1,34,000 crore. Lower put call ratio and predominance of stock futures in the open interest points towards greater retail investor participation in the derivative segment.
It was a choppy week for the Sensex as it reversed lower from the intra-week peak of 20,452. Oscillators in the daily chart continue moving sideways in the neutral zone implying that the index could move either way in the short-term. There is a slight decline in the weekly oscillators though they continue in bullish zone denoting a positive medium-term outlook for the index.
Short-term trend in the Sensex is down from the peak of 20,854. But as explained earlier, the index has strong short-term support in the zone between 19,600 and 19,800. If we consider the minor counts for the up-move from 15,960, the fourth minor of this impulse wave appears to be unfolding now. It should typically halt in the aforementioned support zone.
What follows can either be,
Sideways move between 19,600 and 20,850 for few more weeks before the fifth wave unfolds.
If the fifth wave starts, it can take the index to 20,922, 21,638 or 22,460.
The medium-term view for the index will turn negative only on a close below 19,600. Such a move will open the possibility of a decline to 19,370 or 19,000.
The Sensex can continue to whipsaw in the week ahead as it builds the base from where to launch its next leg higher. Key short-term resistances would be at 20,182 and 20,439. Inability to move above the first resistance would mean that the index could decline to 19,800 or 19,400 in the days ahead.
Conversely a close above 20,450 would imply that the index could take another shy at the previous peak at 20,854 or even 21,207.
Nifty (6,017.7)
The Nifty could not get past the key resistance at 6,163 indicated last week. This level will continue to be a major hurdle for the index in the upcoming week and the short-term view will turn positive only on a close above this level.
Such a move will mean that the index could attempt to move to the previous peak at 6,284 or its long-term high at 6,357.
On the other hand, if the Nifty does not move beyond 6,069 in the days ahead, it will mean that the index could weaken to 5,955 or 5,834.
The medium-term outlook for the index remains positive and if the Nifty holds above the medium-term support zone between 5,890 and 5,960, it can attempt to move higher to 6,290, 6,509 or 6,760.
Global cues
Global benchmark indices moved sideways last week as investors awaited the next trigger to take equity prices in either direction. CBOE Volatility Index moved above the 20 level once again to end the week at 21.2 implying that investors are not willing to throw caution to the winds yet. Latin American markets such as Chile, Mexico and Argentina recorded strong gains.
The Dow moved close to the key long-term resistance at 11,300 to record the intra-week high at 11,247. But it turned volatile thereafter and moved in a narrow range between 11,000 and 11,200. Short-term support for the index is 10,920. If this level is breached, decline to 10,650 or even below could be on the cards.
On the other hand, move above 11,300 will take the index to bull-market territory. — Lokeshwarri S.K.
Reliance Industries (Rs 1,095.8)
The stock advanced Rs 14 in the previous week and is still testing key resistance in the band of Rs 1,090 and Rs 1,100. Short-term trend is up for the stock. However, inability to move above Rs 1,110 will lead to the stock moving sideways in the range between Rs 1,090 and Rs 1,110. Traders can continue to hold their long positions with stop-loss at Rs 1,080.
Targets for the stock are Rs 1,130 and Rs 1,150, a key resistance. On the other hand, a decline below Rs 1,080 can pull the stock lower to Rs 1,060 to Rs 1,050 range.
Medium-term trend too is up for the stock since its September low of Rs 885. Investors can stay invested with stop-loss at Rs 1,030.
State Bank of India (Rs 3,151.2)
After testing near-term resistance at Rs 3,250 on Monday, SBI experienced selling pressure and slipped Rs 50 or 1.6 per cent last week. This was within the stock's short-term sideways consolidation range between Rs 3,070 and Rs 3,300. The stock is likely to be restrained in this range in the short-term.
Traders can initiate short position in rallies with stop-loss at Rs 3,200 and exit at lower levels between Rs 3,050 and Rs 3,070. Fall below Rs 3,050 will lead to short-term downtrend and the stock can slump to Rs 3,000 and then to Rs 2,900. Resistance ahead are at Rs 3,250 and Rs 3,300.
Investors with medium-term perspective can hold the stock with stop-loss at Rs 2,750 and conclusive close above Rs 3,300 can push it to Rs 3,370.
Tata Steel (Rs 590)
In line with our expectation the stock retreated last week by declining 4.4 per cent. Tata Steel has been on a short-term downtrend from its recent peak of Rs 683. Short-term traders can continue to hold their short positions while maintaining stop-loss at Rs 605 levels.
The stock achieved our initial target of Rs 595 on Friday and is heading towards our next target of Rs 573. Key medium-term support for the stock is at Rs 550. However, after a move above Rs 615 the stock can encounter resistance at Rs 625 and Rs 650.
Infosys Technologies (Rs 2,969.6)
The stock declined Rs 83 or 2.7 per cent during last week. It slipped below its short-term support at Rs 3,000 and touched our first price target of Rs 2,950. The stock's on going short-term downtrend from life-time high of Rs 3,249 can continue further to our next target level of Rs 2,900.
Traders can exit their short around this level and be neutral. Investors can prolong their holdings with medium-term stop-loss at Rs 2,750. — Yoganand D.
IFCI (Rs 69.9): After gaining sharply in the last three months, IFCI changed track last week. It now finds an immediate support at Rs 69-68 and resistance at Rs 72. A conclusive close below Rs 69 has the potential to weaken the stock to Rs 62.
Only a strong close above Rs 75 would change the outlook to positive for the stock. In that event, it has the potential to reach Rs 92, though in between Rs 85-86 could act as minor resistance points.
F&O pointers: The IFCI futures (market lot: 4,000) witnessed accumulation of short positions on Friday. Call options at strikes 70 and 75 witnessed heavy accumulation of open interests, indicating strong emergence of call writers. The 70 put also witnessed marginal accumulation, suggesting that traders are cautious on the downside too. However, 75 put witnessed unwinding of accumulation. This suggests that it could act as a strong resistance for the counter.
Strategy: Traders can consider shorting IFCI futures with a tight stop-loss at Rs 72 (on a closing day basis). Shift the stop-loss to Rs 68, if the stock opens on a negative note.
High risk appetite traders can also consider writing 75 call, which closed on Friday at Rs 1.50. While the loss is unlimited in this strategy, the maximum possible profit would be limited to the premium collected; besides traders would have to pay additional margin requirements. This strategy therefore is strictly for traders who have a high penchant for risk.
Reliance Capital (Rs 818): The short-term prospects turned negative for Reliance Capital. Its immediate resistance appears at Rs 856, while it has support at Rs 809.
A close below Rs 809 could weaken the stock to Rs 764 first and later to Rs 702 . However, a close above the resistance could lift the stock to Rs 902 and later to Rs 943.
F&O pointers: The Reliance Capital futures (market lot 500 units) added fresh shorts on Friday. Trading in options indicates a neutral view as both puts and calls added fresh open interest, albeit only marginally.
Strategy: Traders can consider shorting Reliance Capital, if it dips below Rs 809.
Follow-up: Last week, we had advised traders to consider short on Unitech (also writing call) and Bank of India. Both the counters moved on expected lines. — K.S. Badri Narayanan
SPOT/CASH LEVELS FOR INTRADAY TRADING FOR 1ST NOV 2010
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#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. |
PE multiples of global software and hardware majors are nowhere close to the highs of three years ago. But top-tier Indian companies are trading well above the highs of 2007, indicating a run ahead of fundamentals.
K.Venkatasubramanian
Technology stocks around the world, specifically those of IT companies, have seen a visible mark-up in their valuations over the last year. In the Indian market, IT stock valuations actually touched new highs. Today, Indian bigwigs such as TCS, Infosys, Wipro and HCL trade at a significant premium to Accenture, Microsoft, IBM and Oracle.
Though Indian IT majors, with their faster growth rates, optimal cost structures and until now friendly tax-rates have always enjoyed a premium over their global counterparts, the gulf has now widened considerably.
Consider this: Indian IT majors are now trading well above levels that they did during the highs of 2007, just before the sub-prime crisis. Global IT companies too witnessed re-ratings, but are nowhere close to the highs made three years ago. Why are Indian companies fetching such stiff premiums? Have PE multiples run ahead of fundamentals? These are the questions addressed here.
Factors such as earnings growth and expanding wage costs, together with higher attrition, currency appreciation and rising tax-incidence suggest that valuations of Indian IT companies may be too rich for comfort. Certainly, none of these metrics are as robust as they were in 2007 as earnings growth in FY11 and beyond may just be around 10-12 per cent. These apart, billing is just about stabilising and none of these companies is anticipating a rise on that front.
At a different level, mid-tier IT companies are still way behind their historic highs and, apart from the rally from March-October 2009, have not seen any significant run-up in stock prices and valuations.
Premium over global players
Today, an Infosys or a TCS competes with global majors such as Accenture, IBM and Capgemini for IT services deals. These global majors also have a significant presence in India and offer a few similar services and, to that extent, are comparable (though not fully). From revenue and profit declines the previous fiscal, many global majors have turned the tide from late 2009 and much of 2010.
For example, enterprise software service companies such as Microsoft and Oracle, as well as global IT majors such as IBM, HP, Accenture, have managed 9-30 per cent growth in net-profits in 2009-10 (reporting years varies from May, June, August or December). This, after a difficult 2008-09, when revenues and profits fell significantly. Growth has been more robust in recent quarters. These stocks are still trading well below their 2007 PE multiples.
This is significant as hardware and enterprise service companies provide lead indications on client spending for Indian companies as well. Indian majors, on the other hand, may find it difficult to deliver 20-30 per cent profit growth, at least in the next year. Infosys, for one, is guiding for a 7.4 per cent growth in earnings while HCL has seen profits decline, because of its loss-making BPO division and increasing tax provisions. Wipro and TCS managed better profit growth. But, for all these players, growth came partly from cost optimisation
Indian IT companies have been able to recover on the volumes (person-months billed) front, thanks to a reasonable revival in the US-based clientele's IT spends as well as uptick in the key BFSI segment. There has been a mild revival in manufacturing, but telecom is yet to rebound significantly.
These three verticals, along with retail, are the key sectors where IT majors operate. In contrast, global majors such as Accenture, IBM, CSC and HP (through EDS) have a much more diversified client base.
They derive 10-35 per cent of their revenues from government clientele, where a bulk of spending is happening on technology for cost reduction. Indian majors have minimal presence in this segment. Global IT majors operate on about 10 verticals and spread their risks thinly. These players have also been actively pursuing inorganic growth, with hardware companies acquiring software firms, and vice-versa — Dell acquiring Perot Systems, Oracle acquiring Sun Microsystems and HP acquiring 3PAR being cases in the point.
This has helped global IT majors to become well-integrated in their offerings. These players derive more than half their revenues from higher-billed services such as consulting and package implementation, whereas for Indian players, these make up less than a fourth of their revenues.
Even when there is a revival in discretionary spends, as indicated by the September quarter results of the Indian IT companies, it would be quite some time till the service-mix changes dramatically. Global players still manage to get the more lucrative portions of a big deal, while Indian companies land up with the application development and maintenance portion of deals. Contracts such as those from BP and Telstra are examples of this phenomenon.
Closer home, Cognizant, which has outpaced peers such as Infosys, Wipro and HCL, in terms of rate of profit growth (more than 23 per cent compounded annually) even during the heavy slowdown of 2008 and 2009, has not seen its PE multiples exceed its 2007 peak.
It has also been active in inorganic growth and gone in for a number of acquisitions to expand offerings. Given this global backdrop, Indian IT majors seem to be in trading in an expensive zone. Even in terms of key margin factors, there are considerable hurdles that could peg back profit growth.
Margin constraints
The first important constraint is rupee appreciation. With relentless inflows into the markets, the rupee has bounced considerably from 48-49 levels to 44.5 against the dollar now. Companies have stated that every percentage appreciation in the rupee against the dollar erodes 30-40 basis points on their margins. If no restrictions are imposed on capital inflows, rupee appreciation may well be a phenomenon to reckon with on a regular basis.
Second, tax incidence, which was 15-18 per cent for the Indian IT majors, may go up to 20-25 per cent. With the sunset clause on STPI (and with it all tax-incentives) set to go by the end of this fiscal, companies may need to contend with a much higher outflow on taxes. For Infosys, this has already crossed 26 per cent.
Third, wages, which account for 50-60 per cent of revenues for IT majors, are trending up on account of the 10-15 per cent wage hikes announced by companies. With attrition going up from 10 per cent levels to 15-20 per cent for these companies, interim hikes too cannot be ruled out. This is also likely to strain margins.
During the downturn, Indian IT majors increased their offshore component of revenues by as much as 4-6 percentage points and were able to optimise costs. But with revival in deals and even in discretionary spends, the onsite component (or high-cost revenues) is set to go up. With the regulatory framework in the US and the UK favouring more local hiring, clearly, Indian IT majors will have to deal with the outcome of such a regime.
Finally, even from a billing perspective, after several quarters of billing pressure, Indian IT majors have just about managed flat billing rates in the recent quarter. None of them envisages a hike in the near future.
Industry research from Gartner has reduced the forecast for overall IT spending growth from 5.3 per cent to 3.9 per cent for this year. Indian companies may be able to manage 3-4 times that, translating into revenue growth. Nasscom has projected a13-15 per cent growth in IT exports. Indian IT majors may be able to do a bit more around 15-20 per cent with respect to their topline numbers.
Given these facts, frontline IT companies may not offer the best investment option in the immediate future. Investors may reduce the weightage to the sector in their portfolios. Wipro gives the most comfort in terms of valuations and, with the recent correction of 15 per cent, post its results, looks reasonably priced among the top three.
Profits can be booked in HCL Technologies as it continuously faces margin pressure, with its BPO division reporting losses for the last couple of quarters, and is likely to continue to do so, as indicated by the management and the heavy surge in tax incidence from 15 per cent in FY10 to 20 per cent this fiscal and nearly 25 per cent in FY12. At a trailing PE of 22 times, clearly the stock is quite expensive.
Mid-tiers yet to rebound
Even as the markets have been quick to re-rate the frontline IT companies, mid-tier IT companies are still nowhere near their highs made in 2007.
In fact, over the last year, revenue and profit growth have been anaemic.
The results numbers of Infotech Enterprises, Sasken Communications and Mastek are still lumpy; the companies face margin pressure from the limited segments that they operate in as also from increasing attrition and rising wage costs to stem the phenomenon.
Investors can look to exit most mid-tier IT stocks, especially those that cater to limited verticals.
Tech Mahindra (among the larger IT companies) as a play on Satyam as well as its increasing growth in the telecom space and growing non-BT business, is still attractive in terms of valuation.
We recommend buying Polaris in light of its strong positioning in the BFSI segment, impressive revival in revenues, profit growth and attractive valuations of just nine times trailing earnings.
MindTree too can be good add-on as the company is exiting the handset business which should take the overhang away from the stock, while KPIT Cummins can be retained.
A look at how the markets have fared in Muhurat trading over the past few years.
Anand Kalyanaraman
Lights, sound, action. And, of course, the abundance of culinary delights. With the festival season well under way and Diwali just round the corner, it is that time of the year again, when "feel-good" is thick in the air. Some of us, who believe in work-life balance (with a tilt towards the right), hardly need prodding to put in that leave application — we try to make the most of the string of holidays accompanying the biggest festival of them all in India.
However, for the more industrious among us, for whom "Money Never Sleeps" (never mind Oliver Stone's latest lullaby of a sequel to his 1987 classic "Wall Street"), the coming week is one big fat moolah-making opportunity. Businesses of all hues and sizes are going all-out with their special-offer and discount-sale spins .
Now, when the entire economy is in such hyper-mode, can the men and women who provide that eternal lubricant — money — be seen slacking? Blasphemy! The commencement of the traditional New Year "Samvat" is marked at the bourses by a special trading session known as "Muhurat trade". With many broking establishments opening new books of accounts on the big day, symbolic orders (mostly buys) are placed in the Muhurat trade to mark fresh trade in the New Year. The hope is that a good start will set the tone for the year to follow. After all, well-begun is half-done. This year, November 5 heralds the beginning of Samvat 2067, and in keeping with time-honoured traditions, the stock exchanges have announced a special one-hour trading session that evening.
We take a look at how the markets have fared in Muhurat trading over the past few years, and whether the momentum was sustained in the year that followed. We also try to gaze into the crystal-ball to hazard a guess on what Muhurat 2010 may hold in store. But like all good things in life, here is a catch in the form of disclaimers.
1. (As you all know) past performance is not indicative of what may or may not follow in the future;
2. We share credit for only success in your investment decisions; any loss is the sole outcome of your incompetence and/or bad luck.
Clairvoyance!
More often than not, the benchmark market indices have closed higher in Muhurat trading. In the ten years since 2000, only on one occasion has the Sensex dipped on Muhurat trading day. Now, that translates into an impressive hit rate of 90 per cent, not a number to be scoffed at. Clearly, the power of the collective "run them up" spirit is in grand display here.
Now, sceptics among you may frown and argue that trades and upticks driven mostly by sentiment need not be taken too seriously. For all ye nay-sayers who think that markets and superstition don't gel, chew on this. The predictive power of Muhurat trading, as seen from data over the last ten years, could give tough competition to the intuitive powers of even Paul, the Octopus (may his soul rest in peace).
Consider this; in seven out of the nine cases in which the Sensex inched up in Muhurat trading, the bellwether index rose over the course of the following year, and registered gains on an M-O-M (Muhurat-on-Muhurat) basis. Truncate the time-period slightly from Muhurat 2002 to 2009 and the predictive power seems absolute — 100 per cent.
In the sole case (November 2007) when the Sensex closed lower on Muhurat day, guess what was to follow. Absolute mayhem and bloodbath over 2008, with the unprecedented global financial crisis taking a deadly toll on markets across the globe!
The Sensex was no exception, and crashed more than 50 per cent on an M-O-M basis. Need more proof? In October 2008, when all seemed lost and the bluest of the blue chips was available at bargain-basement prices, the Sensex rose almost 500 points in Muhurat trading.
This was perhaps the harbinger of the good times that were to come before Muhurat 2009. Those who could gather the gumption to take the plunge in seemingly troubled waters and, more importantly, hold on when the tide got choppier (in March 2009) would have made a neat killing — more than 90 per cent before the next Diwali, and over 120 per cent till date.
Perhaps, markets do operate in mysterious ways.
Prognosis (at your risk)
Now, with the Indian markets flush with liquidity, thanks to FIIs pouring in money like there's no tomorrow, and Q2 results so far being quite robust on the whole, the bourses may continue to be buoyant. Now, whether that translates into "Citius, Altius, Fortius" over the next year remains to be seen. If it doesn't, don't blame us.
An exception often proves a rule. Also, we've got our backs sufficiently covered. Don't believe us? Read the disclaimer section somewhere above. On a more serious note, do exercise due diligence, and be selective in your stock choices.
With the sharp run-up over the past year and half, the market is no longer cheap and a lot many positives seem to have been priced in. But as always, there will always be the hidden gems, which the discerning investor should be able to dig out with effort and some luck.
On that note, here's wishing all of you a cracker of a Diwali!
Weekend Platter on
Derivative EOD Report on http://www.indiabulls.com/securities/mailermis/derivative-strategy/derivative-EOD-29-Oct-2010.htm
| Buy / Sell (Oct 29, 2010) | |||||||
| Buy | Sell | Net | |||||
| FII | 3350.23 | 2614.83 | +735.40 | ||||
| DII | 1595.76 | 1251.36 | +344.40 | ||||
