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Archive for May 2011

Trend reversal likely below 5250-5350

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In my last blog on 13 May 2011, it was clearly mentioned that markets staying below 5500 could see levels of 5400 which is a very strong support. May expiry started at level of 5750 & now stands at almost 7% down in this expiry. In the current expiry, banking stocks have been worst hit and from the frontline stocks, SBI is the biggest loser down by almost 25%.

From the first week of May, as previously mentioned by me that indices can go up to 18000 / 5400 after it breaches the level of 5700 / 19000. Since last few days markets have started trading below 5400 levels. Outlook based on the charts seems bearish as long as it stays below 5400 and further, the situation will become more bearish if it does not sustain above 5350. Short term oscillators are showing some signs of optimism but it needs support based on the key levels.

If indices manage a bounce back & later sustain above 5460 there is a strong possibility of resumption of uptrend. Tomorrow being the first day of June’s Future Option series, it needs to be monitored very closely for any early indication of change of trend.

Written by Rakesh Gandhi

May 26, 2011 at 7:19 pm

It’s total confusion out there!

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In my previous blog, I wrote about the confusion in the subsidy burden to be borne by the downstream trio of IOCL, BPCL & HPCL and the Govt. Well, the Govt. has announced that its share of the subsidy burden for FY11 would be Rs 41,000 cr and the upstream sector would have to contribute Rs 25,750 cr towards the total FY11 under recoveries of Rs 77,750 cr. This leaves a net under recovery of Rs 11,000 cr to be borne by the downstream sector.

However, confusion continues to persist in the markets, taking its toll on the stocks in the upstream sector, with ONGC losing 6% whereas OIL India & GAIL were down by 4% on May 17. This plunge was triggered by unconfirmed media reports about a hike in the upstream sector’s share of the subsidy burden from the norm of 33% to 38.5%. Not only would this impact the financials of these companies negatively, it would also renew concerns on the ad-hoc nature of the subsidy sharing mechanism which would result in still lower valuation multiples for these stocks in the long term.

However, latest reports indicate that the Govt. is working on a new & transparent subsidy sharing mechanism for the sector. Amongst the various ideas being suggested, the crude price-linked subsidy mechanism, which was first proposed by ONGC and subsequently included in the Kirit Parikh Commission’s report on petroleum product pricing reform, is also being considered. A clear & transparent subsidy sharing mechanism is precisely the need of the hour as it will dispel uncertainty from the minds of the investors and also remove a part of the valuation discount that is currently embedded into the stock prices. In light of the above, we feel that reports about the upstream sector bearing 38.5% of the under recoveries are without any merit.

Moving to the Q4FY11 results, we feel that the combination of $ 100+ crude oil & $ 8+ Singapore GRMs during the quarter would be beneficial for upstream companies and pure refiners. Accordingly, we remain positive on the upstream sector going forward. If the Govt. comes out with an improved subsidy sharing mechanism, this will lead to a re-rating of the sector as a whole.

Written by Fundamental Side

May 19, 2011 at 3:29 pm

Posted in Oil Market

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Selling to accelerate below the key level of 5400

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The Nifty Futures have fallen by almost 8% to 5550 from 5900 in last 16 sessions and currently hold 13 points premium over spot as per closing on 13th May, 2011.

In the current series, 5400 put has seen a maximum open interest of almost 8 million shares, indicating 5400 to act as immediate support, closing below 5400 can extend the current fall with more acceleration. Whereas, among call options, 5800 call holds maximum open interest of 7.5 million shares, indicating the 5750-5800 zone to act as very strong resistance , going forward.

The PCR for Nifty futures stands at 0.86 levels, hanging near around oversold zone. Traders with short positions need to be cautious, if the Nifty breaks the 5630 level on the upside, since short-covering is expected above this level. This will lead to an extension of the up move towards 5700-5750 levels.

Currently, implied volatility (IV) of Nifty put options appears higher in comparison with call options , which is the result of heavy buying in puts in the past few weeks. The NSE VIX stands at 20.63 giving no signal of stability in the market.

This concludes that, selling pressure will increase if Nifty is not able to hold 5400 on closing basis, and it will invite fresh short positions in the market for the retesting of 5250-5200 zone.

Written by Kunal Bothra

May 16, 2011 at 1:18 pm

Posted in NIFTY

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Market Outlook

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We have witnessed three range bound days after a falling streak of nine days. Now, it would seem difficult for the markets to regain their lost trend, but not impossible. Today a possible  increase in volatility can be expected, post the announcement of IIP numbers. Indices are already in a downtrend as indicated in last few days and a bearish trend is likely once it sustains below 5500.

There are three possibilities likely from the current levels as mentioned under.

1. There could be the next leg of a downtrend if Nifty future breaks below 5500 & does not recover.

2. There will be an upward move if Nifty futures manages to breach 5625 as there will be a very aggressive unwinding of short positions.

3. In the event that markets fall below 5500, it can find support & can bounce from 5400 & 18000 as these are extremely strong support levels which will probably not be broken easily.

Written by Rakesh Gandhi

May 13, 2011 at 1:40 pm

Posted in Market Watch

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Seasonality takes its toll on the auto numbers

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April sales numbers for most of the auto companies were modest on a month on month (m-o-m) basis as per our expectations. The softening of auto sales in April is a seasonal factor as auto companies push volumes at the dealers’ end before the financial year end. Hence on a sequential basis, the volumes have fallen as per our expectations. We expect  approximately a mid teen digit of growth in the auto segment, which may wary according to the sub sectors within the segment – PV(15-17%), 2W(12-13%) and CV(13-14%). However, stock based outperformers in the sector will be M&M (unique portfolio of products, dependence on rural markets and market leadership with a significant margin), Bajaj Auto (increasing market share, strong export presence and dual brand dependence) and Tata Motors (CV market leader and strong international business) remain our top picks within the auto sector.

Hero Honda – (TP – Rs1,527, Underperform)

Hero Honda reported a 39% yoy strong growth to 5.17 lakh units in March, while it was a flattish growth mom. With this strong growth, the company has continued its strong run with a wide portfolio of products. Going forward, with the Honda split done, the company will face strong competition from Honda, raising concerns regarding R&D and maintaining the brand name. Furthermore, the company has to pay royalty of Rs24bn to Honda over next 3 years, which will raise the royalty as a % of sales to 3.5-3.8% from current 2.8%. This will impact margins negatively. Margins to get impacted on this account and also due to additional spending the company have done on advertising during Cricket World Cup in Q4 FY11. New production plant, opportunities in export markets and new launches can trigger the stock price in the medium to long term.

Bajaj Auto – (TP – Rs 1,680, BUY)

Bajaj Auto reported a 17% yoy growth in total sales in March to post sales of 3.67 lakh units. The monthly sales were significantly up by 22% on mom basis, as the company’s exports of 32,000 units were in transit last month due to crisis in the Middle east and North Africa. Excluding the impact of that, the sales would have grown by 6% mom. Management expects the recently launched Discover 125cc to add volumes of 30,000 per month, which along with the addition of 130 new dealers will lead to Bajaj Auto looking at monthly sales in the vicinity of 4lakhs this quarter. Also the company has enhanced its 3 wheeler capacity to 45,000 units per month, which will help the company to achieve its new year target.

Mahindra and Mahindra – (TP- Rs 861, BUY)

M&M reported a strong 23% yoy growth in its auto segment to 32,090 units, with passenger UV sales growing 15%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a 16% growth yoy. Verito, the new name of Logan has posed yet another month of improved sales performance with a growth of 232% yoy will sales recorded at 1,006 units. This has been a very consistent performance from Verito which is expected to get a further lift in performance post M&M brand getting associated with it shortly. LCV and MHCV sales also saw a growth of 9% yoy in a month which is usually dull.  Farm Equipment Segment (FES) posted a very robust growth of 14% yoy to 18,530 units, while sequentially they were slightly down. In April, M&M launched the Maxximo minivan at Rs3.2lakhs which is expected to add to the PV segment of M&M along with Verito. M&M expects May and June to see strong tractor sales. New plant at Zaheerabad will significantly boost tractor sales in the medium term.

Maruti Suzuki – (TP – Rs 1,441, Neutral)

Maruti Suzuki (MSIL) reported their lowest sales since June 2010, by selling ~97,155 units in April, a growth of 4.4% yoy and a dip of 22% mom, in a seasonally dull month. A3 segment was the top performing segment with 39% yoy growth, due to the launch of SX4 diesel variant launch last month and strong Dzire sales. Kizashi sales were at 35 units. C segment sales were up by 22.2% due to strong demand for Eeco in taxi segment as well.  Exports deteriorated to ~10,000 units , down by 23% yoy as well. The overall sentiment in the PV market is slightly weakening as footfall conversion ratio is decreasing on higher interest rates and rising fuel prices. The capacity expansion coming up in the coming 1.5 years will lead to significant jump in the company’s volumes and topline, however in the short term, the company will struggle maintaining its margins against appreciating yen leading to higher royalty payouts, vendor issues rising from Japanese crisis, increasing fuel costs, inflation  and rising commodity prices.

Tata Motors – (TP – Rs 1650, BUY)

April sales for the company were at 64,383 units, 13% up yoy and a 23% fall mom. The company had already guided rationalization of production to balance the inventories at the dealer’s, in line with which the company produced 10-15% lesser than March. CV sales grew by 19% yoy, out of which LCV sales were up by 28% yoy and MHCV sales were 6% higher yoy. PV segment sales went up slightly by 4% yoy and were down by ~20% mom to 25,436 units while utility segment sales grew by 15% yoy on the success of newly launched Aria.  Indica range continued to see a de-growth of 53% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai feeling the heat. Indigo range sales were also low by 27% yoy. Nano sales were the exception with higher m-o-m numbers at 10,012 compared to 8,707 units in March and 500 units in November.

TVS Motor – (Under Review)

TVS sold 1.67 lakh units in April, a growth of 14% yoy, while on a mom basis it showed decline a 13% growth. This decline was due to usually weak April. Management is expecting the export volumes to pick up in the coming months while domestic volumes to get slightly impacted by interest rate hike, but will get support from the higher utilization rates with higher expected demand.

From the desk of Ashwin Patil

Written by Fundamental Side

May 3, 2011 at 4:24 pm

Gaining Pain versus Paining Gains

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When DXY Index broke below 73 in April 2011, the hope for a revival just got thinner as the world
rejoiced a weak USD against majority of currencies. After all it helps in minimizing the pain inflicted by
rising commodity prices.

When most of us expected FED Chief Ben Bernanke to raise interest rates like the ECB which did so in
April 2011, the FED kept the rates unchanged but signaled the end of Bond buying program by June
2011.

The question is, how long will the falling dollar to rising commodity prices equation last? For how long
will we continue to rejoice that rising crude oil prices won’t affect us that severely as the impact is
reduced due to the strong local currency against the US Dollar. Don’t forget that the same is not true
for Americans who are losing their edge due to weakening Dollar. Is it right to envisage that the FED will
continue to be a mute spectator for an extended period of time, as the same is being preached or fed to
the media in the speeches of Mr. Bernanke. The charts of US10YR bond yields are suggesting an end of
the bull market in US Bonds which have been in place for past 3 decades now. The exit of US Bonds and
treasuries by PIMCO add fuel to the possibility that the good times in US Bonds may be coming to an
end for the good given the stature of the PIMCO chief Mr. Bill Gross.

Either the downgrade by S&P will be proved correct which means US Dollar would depreciate further
against other currencies or the Dollar will rise from the ashes.

Last year around the same time or to be very precise on June 2, 2010, DXY Index was at 89 and Europe
had fallen of the cliff, today the scenario is inverse. Though dollar has fallen off the cliff, Europe isn’t out
of the woods yet.

We would accede to the thought of a bearish dollar once its breaches below the low of 71 formed in
April 2008 and not before. As a player who believes in investing through the principle of contrarian
opinion, a long position in USD could be a good idea if DXY Index falls to 72 areas and stops can be
placed at just below 71. It won’t be a surprise to see the investment generating positive alpha in the
next 24 months time.

US Dollar Index (Monthly)


Written by Dwaipayan Poddar

May 2, 2011 at 5:30 pm

Posted in Market Update

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