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Archive for September 2011

Gold prices set to fall

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Gold is back in the limelight after a stellar couple of months. As you can see from the chart above it has rose from $1000 odd levels in 2009 to above $1900 levels.

Looking at the chart above it is just unbelievable to imagine how one asset class can just rise continuously for the last 11 years.

The most interesting part about this rise is that it has managed to prove the so called “Dow Theory” correct year on year since the last decade by forming a higher high and higher low. For instance, look at blue arrows, which signify the low price in a year, for Gold, and it is just startling to know that the gap between two successive bottoms and how the gap between successive bottoms has expanded beyond proportions. What I want to emphasise is the steep increase in the price activity in the last 4-5 years, which is causing the huge gap between the subsequent lows of the candle.

Factopedia: The rise, as the chart depicts, is from a low of $253.75 to $1920.30 in a span of 11 years. This makes it a stupendous 675% rise or 7.57 times the year 2000 low.

However, I believe, that we are already too late to board the bus. The only confirmation which I am waiting for is a breach of the previous yearly low, which currently stands at $1308. It is too farfetched a stop loss, but my point is that uptrend for Gold is in jeopardy and price warrants a correction, a sharp one.

The same fate happened with Silver not too long ago, when it rose sharply to $48-49 levels in a matter of weeks and then corrected sharply to below 40$ in a matter of days.

Let us have a reality check on this, and whether the steep rise in gold is justified, and what would likely be the future course of action for the same.

I was talking to some of my friends in the last few weeks discussing about the markets and current grim situation in the equity markets. Just to give you an outlook, these friends of mine have always wanted their money safe, not to invest in equity markets, and have complete risk aversion. They were telling me that Gold is one of the safest asset classes at this point and that they have invested a good amount of their money buying gold ETF’s. Not just that, the local taxi drivers are interested in knowing the potential upside of Gold. To top that up, even a lot of local jewellers have opened various schemes on Gold investment, making it very conspicuous to every investor.

Now my only point of contention is Gold has been rising for the last 11 good years, and realising now that Gold is one of the safest asset class, I think, is clearly too late. And that too nothing has changed about Gold since the last couple of years, other than increased investor speculation and scare across the equity market investors.

The current situation is kind of “euphoria”, and hardly anyone wants to look at the downside possibilities of Gold. It is similar to any bubble in the past, be it the Tulip bubble, dot.com bubble, and the 2008 crisis, which showed how a particular asset class considered infallible, was taken apart.

The triggers for correction in Gold prices include a rally in equity markets across the world. Also, if the dollar was up versus the world and then the euro was also up against the US dollar. Supply demand factors involved with mining gold also plays a role, but the real key to use gold in a portfolio successfully is as a hedge against world stagnation in real growth accompanied by high currency growth.

Markets do not give an easy money making opportunity for investors, especially with the current aura of optimism. I believe that we are near a long term high in Gold and investors should be trimming back positions on this run. Remember Gold too has peaks and valleys, and it has moved in this pattern for years. Which is why the likely conclusion of this massive parabolic blow-off is nigh.

To give you a glimpse of history, in late 70’s and early 80’s, gold experienced a similar rise which we are seeing today. It rose from levels of $ 200 per ounce in 1978 to levels above $850 in a couple of years. Back then the economic environment was plagued with inflation and turbulent times in equities. Investors piled on to gold thinking it was a safe haven at all times. Gold corrected sharply for the next two years falling below $400 levels, a reduction of 50% from the high, and thus stalling the exponential rise.

If anyone who believes that History repeats itself, needs to be wary of Gold. Fear when everyone is greedy.

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Written by Kunal Bothra

September 22, 2011 at 11:22 am

Gold prices set to fall

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Gold is back in the limelight after a stellar couple of months. As you can see from the chart above it has rose from $1000 odd levels in 2009 to above $1900 levels.

Looking at the chart above it is just unbelievable to imagine how one asset class can just rise continuously for the last 11 years.

The most interesting part about this rise is that it has managed to prove the so called “Dow Theory” correct year on year since the last decade by forming a higher high and higher low. For instance, look at blue arrows, which signify the low price in a year, for Gold, and it is just startling to know that the gap between two successive bottoms and how the gap between successive bottoms has expanded beyond proportions. What I want to emphasise is the steep increase in the price activity in the last 4-5 years, which is causing the huge gap between the subsequent lows of the candle.

Factopedia: The rise, as the chart depicts, is from a low of $253.75 to $1920.30 in a span of 11 years. This makes it a stupendous 675% rise or 7.57 times the year 2000 low.

However, I believe, that we are already too late to board the bus. The only confirmation which I am waiting for is a breach of the previous yearly low, which currently stands at $1308. It is too farfetched a stop loss, but my point is that uptrend for Gold is in jeopardy and price warrants a correction, a sharp one.

The same fate happened with Silver not too long ago, when it rose sharply to $48-49 levels in a matter of weeks and then corrected sharply to below 40$ in a matter of days.

Let us have a reality check on this, and whether the steep rise in gold is justified, and what would likely be the future course of action for the same.

I was talking to some of my friends in the last few weeks discussing about the markets and current grim situation in the equity markets. Just to give you an outlook, these friends of mine have always wanted their money safe, not to invest in equity markets, and have complete risk aversion. They were telling me that Gold is one of the safest asset classes at this point and that they have invested a good amount of their money buying gold ETF’s. Not just that, the local taxi drivers are interested in knowing the potential upside of Gold. To top that up, even a lot of local jewellers have opened various schemes on Gold investment, making it very conspicuous to every investor.

Now my only point of contention is Gold has been rising for the last 11 good years, and realising now that Gold is one of the safest asset class, I think, is clearly too late. And that too nothing has changed about Gold since the last couple of years, other than increased investor speculation and scare across the equity market investors.

The current situation is kind of “euphoria”, and hardly anyone wants to look at the downside possibilities of Gold. It is similar to any bubble in the past, be it the Tulip bubble, dot.com bubble, and the 2008 crisis, which showed how a particular asset class considered infallible, was taken apart.

The triggers for correction in Gold prices include a rally in equity markets across the world. Also, if the dollar was up versus the world and then the euro was also up against the US dollar. Supply demand factors involved with mining gold also plays a role, but the real key to use gold in a portfolio successfully is as a hedge against world stagnation in real growth accompanied by high currency growth.

Markets do not give an easy money making opportunity for investors, especially with the current aura of optimism. I believe that we are near a long term high in Gold and investors should be trimming back positions on this run. Remember Gold too has peaks and valleys, and it has moved in this pattern for years. Which is why the likely conclusion of this massive parabolic blow-off is nigh.

To give you a glimpse of history, in late 70’s and early 80’s, gold experienced a similar rise which we are seeing today. It rose from levels of $ 200 per ounce in 1978 to levels above $850 in a couple of years. Back then the economic environment was plagued with inflation and turbulent times in equities. Investors piled on to gold thinking it was a safe haven at all times. Gold corrected sharply for the next two years falling below $400 levels, a reduction of 50% from the high, and thus stalling the exponential rise.

If anyone who believes that History repeats itself, needs to be wary of Gold. Fear when everyone is greedy.

Gold- price graph

Gold Price

Written by Kunal Bothra

September 20, 2011 at 4:47 pm

Not a bad month for autos

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Not a bad month for autos though car sales disappoint

August, a month where rainfall is at its peak after July, is traditionally a month of subdued auto demand. Such a mood was seen in the cars segment, while the commercial vehicles and two wheelers bucked the trend. August was a month better than July for the auto sector when interest rates were hiked, while fuel prices showed their complete impact. As expected the cars segment of Maruti and Tata Motors underperformed on competition and macro concerns, while two wheeler companies like Bajaj Auto and TVS reported their record sales. The trend in the LCV segment is also still going strong as indicated by M&M and Tata Motors’s LCV sales. On the MHCV side the growth seemed to be not bad at all, with Tata Motors posting a double digit growth of 12% yoy. To sum up, we continue our negative stance on Maruti Suzuki which is the biggest victim of the macro headwinds, followed by Ashok Leyland with an undiversified business will feel the heat. On the two wheeler side, Hero Honda’s value is factored in its stock price, while we see margin pressures to add to the company’s woes. TVS Motor, M&M and Tata Motors remain our top picks within the sector, while the sudden sharp run up in Bajaj Auto’s share price has led us to downgrade it to Neutral from BUY as our target price of Rs 1647 got achieved today.

Ashok Leyland – (TP – Rs21.5, SELL)- Disappoints again

Ashok Leyland (AL)’s sales in the month came in at 7218 units, down 4% yoy and 8% mom. As mentioned above, the presence of the company in just MHCV business is hurting it as macro cues tend to worsen. The recently launched LCV ‘Dost’ will take some time to show its results in the volumes, while at the same time it will face competition from the established Tata Ace and M&M Maxximo. In August, AL’s domestic business sales fell by 8% yoy, while exports posted a strong growth of 35% yoy, which was not sufficient to offset the de-growth in the domestic business.

Bajaj Auto – (TP – Rs1,647, Neutral) – Racing ahead on twin horses

Bajaj Auto has posted a record performance in August by selling 3.83 lakh units, a growth of 16% yoy and 5% mom. On the motorcycle side, its twin brands Pulsar and Discover reported strong growth and contributed about 65% of total motorcycle sales. The company has recorded highest ever motor cycle sales thus indicating that the 2Wheeler sector is insulated from any macro headwinds. Three wheeler sales came in at 44,685 units, a growth of 11% yoy, flattish qoq. Opening up of permits in 4-5 states will help the company to sell a significant amount of 3Wheelers in the coming months. On the export side, Bajaj Auto sold 1.38 lakh units, a growth of 40% yoy and contributed 36% of sales v/s 29% yoy, which indicates a better profitability in the month.

Hero Motocorp – (TP – Rs1,560, SELL) – Volumes strong, valuations overstretched

After unveiling its new brand, logo and a heavy advertising campaign, Hero is poised to report strong sales without support of old time partners Honda. Sales for the month reflected its strong marketing campaign as they sold 5.03 lakh units in August, 19% up yoy in line with the strong performance of the 2W segment. The company unveiled two of its new products, a 110cc scooter Maestro and  a 150 cc motorcycle Impulse to be launched soon. They also plan to enter export markets big time for which they have identified key markets in Africa, LatAm and South East Asia. All said and done, we remain negative on Hero Motocorp as we believe that branding and R&D expenses along with competition will hit the bottomline significantly. At this price, the stock is trading at 17.5x times FY 13 multiple which we believe is overstretched.

Mahindra and Mahindra – (TP- Rs 831, BUY) – Noncore auto business supports growth

In August M&M sold 37,684 units, a 30% growth yoy and a slight decline mom. UV sales in the month were a slight disappointment as they grew by just 7% yoy, however with festive season round the corner, it is expected to bounce back. 4W pick-up segment which includes Gio and Maxximo posted a robust 67% growth yoy as the LCV segment continued to grow at a strong pace. Verito has posed yet another stellar month with a growth of 113% yoy with sales recorded at 1,710 units , 5% mom above 1,630 units sold in July. Export sales also moved up by 57% with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 21% yoy to 15.059 units, while sequentially they were down by ~10% on higher purchases in July, which is the peak monsoon month.

Maruti Suzuki – (TP – Rs 1,195, Underperformer)- Troubled by both macro and micro issues

Maruti Suzuki (MSIL) ‘s sales in August came at 91,000 odd units, a decline of 12% yoy, while on mom basis it was up by 21%.  In July the sales were down due to shifting of production of Swift Dzire from Manesar plant to Gurgaon plant and discontinuation of dispatch of old Swift in July before the upcoming launch of new Swift in August. Both these activities hit the company by  collective sales of ~17,000 units, which got rectified in the month of August with the launch of new Swift and complete transfer of Swift Dzire production to Gurgaon, but it still fell short of the 1lakh mark recorded last year. Going forward, the recent hike in interest rate by RBI will lead to it getting passed to customers sooner or later, which will further impact demand. New launches from competitors and fuel price hikes will add fuel to this. Hence , we believe that Maruti will continue to underperform its peers and the auto industry over the next one year. Repeated strikes by workers at Manesar plant are jolting the production targets of the company thus hampering the topline growth. However, the recent commencement of second line of production at Manesar plant will somewhat help Maruti to regain the lost market share.

Tata Motors – (Under review)- Underperformance in PV business overshadows outperformance in CV business

August sales for the company were at 64,078 units, 3% down yoy remaining flat mom. CV sales grew by 21% yoy, out of which LCV sales were up by 27% yoy and MHCV sales were 12% higher yoy. This reflects strong CV sales despite macro headwinds. PV segment sales were down by 34% yoy to 17.898 units while utility segment sales went up by 15% yoy.  Indica range continued to see a de-growth of 4% yoy as competition in the hatch back segment continued its intensification with the market leaders Maruti and Hyundai also feeling the heat. However, it was a recovery compared to Indica sales last month which fell by 32% yoy.  Indigo range sales were also low by 24% yoy. Nano also underperformed, continuing its downward trajectory selling only 1,202 units, down 85% yoy  as a fortnight long production break was taken by Tata Motors at Sanand plant for maintenance purpose as well as realignment of production for inventory rationalization.

TVS Motor – (TP- Rs 66, BUY)- Three wheeler growth was the highlight, 2 wheelers post a stable growth

TVS sold 1.94 lakh units in August, a strong growth of 14% yoy, while on a mom basis it inched 3% up. Scooter sales grew by 28% on strong Wego sales, while motor cycles grew by 17% yoy despite Jive being a failure. Total domestic two wheelers grew by 11%, while exports sailed by 48%. This growth indicates that the macro concerns have still not hit the two wheeler sector and TVS’s brands are showing a good demand. 3W sold 4,714 units up 20% yoy and 43% mom, which indicates a solid and quick pick up in TVS’ three wheeler, the ‘King’. Opening up of new 3W permits and launch of 2 new 2W will lead to a good traction in TVS sales going forward. Management has guided for a 15% volume growth this year, which we believe will not be difficult to achieve if sales growth continue at this pace.

 

 

 

 

 

 

 

Written by Fundamental Side

September 6, 2011 at 2:06 pm

Its a buy call for Petronet LNG-Target Rs. 220

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Its a buy call for Petronet LNG-Target Rs. 220

For the increasingly gas-starved Indian market, Petronet LNG Ltd is undoubtedly the biggest beneficiary due to its de-risked business model of charging fixed tariffs for supplying R-LNG. It enjoys the first mover advantage in this space with its 10 MMTPA LNG terminal at Dahej and taking advantage of the favorable economics of this industry, the company is planning to double its capacity to 20 MMTPA by end-FY15. It is also expanding its Dahej capacity by 5 MMTPA and setting up a greenfield LNG terminal of 5 MMTPA in Kochi. Commissioning of the Kochi terminal is expected by Dec 2012 and expansion of Dahej capacity to 15 MMTPA by Mar 2015. Significant shortfall in domestic gas supply going forward, active sourcing of LNG contracts and the first mover advantage combines to position Petronet as an attractive investment opportunity.

The company is optimally placed to take full advantage of the growing demand-supply gap (178 mmscmd by FY15) of natural gas in the Indian market. It has tied up long term supplies of 7.5 MMT from RasGas, Qatar, 1.44 MMT from Gorgon, Australia and is negotiating supply of 2.5 MMT from Gazprom. The derisked nature of the business stems from the GSPA which provides for escalation in regas tariff of 5% per annum, with the tariffs translating into project IRR of 16%. Moreover, the company purchases spot LNG cargoes on which marketing margins are also charged and it also provides regasification services to customers. The locking in of IRR (16%) on long term cargoes, with additional upside from marketing margin on spot cargoes, result in a series of sustainable & predictable cash flows from the business.

Going forward, we expect sales CAGR of 35.3% & net profit CAGR of 32% during FY11-13E owing to higher capacity utilization at Dahej & commissioning of Kochi. We estimate further capex of Rs 20 bn in Kochi and Rs 20 bn for expansion in Dahej. We estimate debt to rise from Rs 32.2 bn in FY11 to Rs 46.8 n in FY13 and free cash flows to improve from (Rs 3,231.1 mn) in FY12 to (Rs 1,689.7 mn) in FY13.

Our DCF valuation of its existing LNG terminal at Dahej as well as the upcoming Kochi terminal and capacity expansion at Dahej gives us a price target of Rs 220. Higher than expected demand for gas may result in higher marketing margins, which is an upside trigger for the stock.

 

 

 

 

Written by Fundamental Side

September 5, 2011 at 2:03 pm

Nifty may face resistance around 5,150-5,265

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Nifty may face resistance around 5,150-5,265 range in the coming week

 A year ago, month of September was an excellent month for trading in the Indian markets. The Sensex and the 50-share Nifty index were in touching their all time highs. Indian markets registered double digit gains, making it one of the solid months of 2010.

Exactly a year later, in September 2011, Indian markets are struggling to find their base, and the amount of pessimism at these levels is way too high.

The last week, was a very short one (in terms of the number of trading days), however the markets registered some excellent bounce, making it a 3 on 3 for the week. The bounce was much anticipated and much needed for the markets, looking at the kind of battering the stocks had faced for the couple of weeks before.

Talking about the sectoral performances, two sectors which have witnessed strong price action in this leg of rally were the metals and realty sectors. If we take a close look at the statistics below it will show the amount of short covering witnessed in these two sectors.

The laggards, however, have been the defensive space, FMCG, CG and CD. However, concerns still remain on the underperformance of banking and auto stocks.

The comparison below is for all BSE sectors with respect to the Nifty (except on WTD basis).

Technically, the markets took strong support from 4,750 levels on Nifty and are now well above the 5,000 mark, making it a sharp 6%+ bounce.

The resistances for the markets are placed at 5,150-5,265 levels for the coming week. However looking at the kind of activity stocks are exhibiting, I believe that the markets can sustain this bounce as well.

Also, the sentiment is filled with pessimism, hence the chances of markets taking out the resistance is very high. However, the only strain could come from weakness in the global markets, or any new events unfolding in the coming week or month.

Markets have historically seen a volatile month of September. For starters, from 2003-2010, we had only one year of 2008 where Nifty gave negative returns. Barring that in the other 7 occasions, the market has closed in positive.

Even if history does not repeat itself, let’s hope it does rhyme!!

Written by Kunal Bothra

September 5, 2011 at 1:53 pm