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Archive for May 2012

Wait for a reversal signal – patience pays

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Wait for a reversal signal –  patience pays

The Nifty ended in deep red near its important support level on Wednesday as weak cues from global markets and the depreciating rupee weighed on sentiment.
The Nifty has been moving downward for more than a year. The downtrend reversed in January this year when the index rallied smartly from 4,530 to 5,630 in a span of just two months.
“At current levels, chart patterns looks extremely bearish and one needs to remember that bottoms are formed in such gloomy situations. “However, at this stage there is no such indication of a bottom being formed but, indices remaining in a range for few days at these levels could make case of some early signals of a bottom formation. From a trader’s perspective,  the view is that the stage is set up for a bounce bank if the Nifty sustains above 4,960 levels and the Sensex above 16,400.

Based on long term charts 4750 to 4800 remains very strong support and Nifty is unlikely to fall below this in absence of any further negative news flows.

Bank nifty has seen low of 9000 and momentum traders need to watch 9500 levels very closely as a move above this will be very clear indication of  a positive trend building up. There can be very frenzied squaring of short position seen once Bank Nifty sustains the above mentioned levels. In this depressed period,  systematic trades with a very strict stop loss should only be initiated however, medium to long term investment can be initiated on dips on a regular intervals in small parts. Looking from a long term perspective If it is about risk-reward, I think this zone provides a favourable risk reward ratio.

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……All Fall Down

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……ALL FALL DOWN

We have witnessed an extremely topsy-turvy first 6 months of year 2012. First two months the markets saw a stupendous rally mitigating for the losses of full year 2011. March was eagerly awaited due to Budget and the crucial RBI policy, however, after that the months which followed have seen a sideways action for the markets, and off late we are seeing the markets, especially the stocks rather than the indices crumbling.

Technically, the markets have undergone severe damage leading to a sea-change in the outlook going ahead. The benchmark indices have closed below their crucial 200 DMA levels, as well as breached the key retracements levels of 61.8%. Interestingly, the stocks which called the shot few months back, are struggling to find any sort of support in this market.

But as we know, history is history, what is more important is the current scenario and the outlook going ahead. Jumping to the last few weeks of trading, I think one very important factor which is developing, is the fall of all asset classes across the board. Take global equity indices, US or European, or Crude Oil, Gold / Silver, etc., all of these are witnessing a sharp correction. I think, this is a clear case of risk aversion happening across the global investors, which is leaving a deep impact on the equity markets especially.

With Oil correcting by more than 10%, it provides a favourable backdrop for RBI to cut rates. If rate cuts ensue in the next few policy meetings, markets could provide the much necessary boost.

QE3, seems to be now the talk of the Wall Street, with June meeting eyed for any chance by the Fed to inject liquidity into the system.

If it is about risk-reward, I think this zone provides a favourable risk reward ratio to investors, looking from a long term perspective.

Trading has been on lacklustre in the last few weeks, however once the markets stabilises and volatility subsides, a short term reversal can most likely happen.

As of immediate short term, it is a wait and watch, however, I believe one should look at stock specific opportunities to start building a robust portfolio for rough times ahead.

Trade with strict stop losses, and more important is trade light.

In such times, I believe one should adopt a strategy of “ Live today, so that you can make a killing tomorrow”. This means, trade light in this market, and once a favourable trend begins one can start investing in good volumes.

 

 

April – A mixed bag in Motown

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April – A mixed bag in Motown

The month of April witnessed weakness in auto sales for companies like Maruti and Tata Motors, while 2 wheelers like Hero and Bajaj reported good sets of numbers. M&M put up a good show on the auto side, on the new launch of XUV 500. Rise in fuel prices and excise duty hikes on national as well as state levels led to hampering of sentiments, while interest rate cut of 50 bps had some positive impact. CV sales were the most affected during the month as macros posted weak set of numbers (IIP). ON the PV side, we believe the first half of the year will be slightly tepid, while any further cut in interest rates, new model launches and diesel engine capacity ramp up will help the auto industry to grow mainly in the second half of the year. Strong two wheeler sales of the two market leaders was a big surprise as the street expected weakening of rural growth to impact two wheeler sales negatively. The growth in 2wheeler sales indicates resilience on their part.

Hero Motocorp – (Under review)- Surprised one and all

Hero posted a growth of 4% mom and 7% yoy in April at 5.51 lakh units. This was above our expectations as April is generally a weak month when compared sequentially defying any slowdown or sluggishness in the domestic two wheeler industry. However, competition from Honda, new launches from Bajaj and slowdown in the rural markets remain overhang on the stock. Still among 2 wheelers, we prefer Hero over its peers due to its market leadership position, strong presence in the executive segment, widespread dealership network and array of strong products.

Bajaj Auto (TP – Rs 1,620, Neutral)- Weakness ahead

Bajaj posted 4% yoy growth in April which seems not too impressive, however it grew by 14% on mom basis which is a good start for a new year. Motorcycles grew by 6% yoy while 3 wheelers de-grew by 13% yoy. Export growth was at 7% Exports of the company jumped to 44% of sales as compared to 34% in March. Going forward, we believe that the company will continue to face increased competition from Hero and Honda in the domestic markets and new launches within the Discover and Pulsar range may cannibalize its existing portfolio. On the export side, Sri Lanka (20% of exports) increasing import duties on 2W and 3W and Indonesian auto manufacturers projecting de-growth for FY 13 may impact Bajaj Auto’s performance. However, management guided for a 6% growth in Q1 FY13 and to sell more than 3 lakh motorcycles per month this year. They also expect to grow at market growth rate this year.

Mahindra and Mahindra – (TP- Rs783, BUY) – Auto segment strong, FES segment subdued…

M&M sold 40,719 units in the auto segment, a 27% growth yoy which was a good number for M&M. Passenger UV sales in the month grew by 33% yoy to 20,558 units, which was a slight decline mom. The yoy sales growth came on the back of the new launch of XUV500. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 37% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Export declined significantly to 1,420 units. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved in November, and moved down even further to 15,315 units in December and continued to go down with a negative growth of 6% yoy in January. This negativity went further deep in February, as M&M reported 20% dip in this month on issues of increasing delinquencies on the agri credit, slowdown of farm yields and overall tepid growth in Indian economy. However, March showed some revival in tractor sales on a mom basis, as they sold 17,405 units, almost a 15% growth mom. In April, again the segment showed slight weakness as sales fell by 8% mom and 13% yoy.

Maruti Suzuki – (TP – Rs 1,300, Underperformer)- Performance lower than expected

Maruti Suzuki (Maruti)‘s sales in this month came at 100,415 units as compared to 97,155  units, 3.4% growth on yoy basis. In a scenario where petrol prices are moving up, the bread and butter segment, the mini segment of Maruti comprising Alto, Wagon R and A Star de-grew by 26.4% yoy. The compact segment comprising Swift, Ritz and Estilo showed a solid growth of 43% as demand for diesel cars is moving northwards on the backdrop of gap between petrol and diesel prices increasing and the production of high demand new Swift getting back to normalcy of >17,000 units per month.  Vans segment de-grew by 10% yoy as vehicles such as Omni and Eeco underperformed. In the SUV segment, the launch of Ertiga led to s strong growth to 5,593 units v/s 217 units yoy. Dzire model grew by 31.5% as the new diesel model consistently performed. SX4 model declined heavily by about 70% yoy as there was dearth of diesel engines. Exports grew by just 1.5% yoy, while de-growing by 32% mom to sell 10,160 units. Any further rate cut by the central bank of India may have a positive impact on the volumes, while petrol price hike will impact sales adversely. State level levy of extra excise duty on cars will impact sales in those states in coming months(eg:- Maharashtra). Restriction on the expansion of diesel engine capacities lead to a cap on the diesel engine sales going forward. Also yen appreciation and fuel price hike along with doling out of higher discounts on petrol cars will be impacting the stock negatively.

Tata Motors – (TP- Rs318, BUY)- Negative surprise

April sales for the company were lower by 7% yoy, while on mom basis, they fell by a huge 40%. CV sales dropped by 6% yoy, out of which LCV sales were up by 9% yoy signifying LCV segment’s defiance of the macro uncertainties. New launches like the variant of Ace Zip led to the growth in LCV. MHCV sales however slipped by 29% yoy as macro weaknesses surfaced in the month. PV segment sales fell by 7% yoy which was arrested upto some extent due to Indica range which was up 63% yoy on new launch of Indica Vista launched a quarter back. Utility segment sales went up by 5% yoy. Indigo range sales were down by 31%. Nano sales declined to 8,028 units which was a decline of 20%. Although the domestic business has underperformed this month, on a broad basis, it has performed well in the past and the contribution of domestic business to the total profits is just 20%, which leads us to maintain BUY on Tata Motors as JLR business is outperforming.              

TVS Motor – (TP- Rs 50, Neutral)- In line with expectations

TVS sold 1.74 lakh units in April in line with our subdued estimate. This was a de-growth of 4% mom and a growth of 4% yoy. Motorcycles de-grew by 4% yoy, while scooters grew by 2% yoy. 3 Wheelers have continued their underperformance as they declined 19% yoy to 2,961 units. In FY 13, TVS expects  to grow at 8-10% against 7.9% in FY 12. With rising competition in the scooter segment from Honda, M&M and Suzuki, slowdown in motorcycle segment and structural weakness in 3 Wheeler segment , we continue to believe that TVS will be a laggard in the 2W segment.