IndiaStar.biz - Indian Stock Market Guide

Last Modified on 27 Jan 2010: After 5 consecutive days of market fall, we are now holding on to the support offered by 4850 on the Nifty, which is a crucial support level. It had also played a role during the Dubai crisis day on Nov 23. But the current correction is clearly bigger as the  FIIs have been net sellers every day for the last 5-6 days.

The market will hold and move up by end-Feb towards 5100, before the budget in end-Feb.

Older text: NIFTY 5400 is Our Target For Feb 2010; at that point, you should convert at least 50% of your portfolio into cash. Even currently at 5225, you should have 15-20% portfolio in cash so that any dips can be bought. Large cap stocks that can deliver good return from now to end-Feb 2010 are:  NTPC, Tata Motors, Reliance Media Works (Adlabs), Hindalco, Tata Steel, Satyam

Mid cap stocks that can deliver good return from now to end-Feb 2010 are: Peninsula Land, Lakshmi Energy & Foods, Orbit Corp, Panacea Biotech, KSK Energy, IOB (Indian Overseas Bank), Varun Shipping

Small cap stocks that can deliver good return from now to end-Feb 2010 are: Munjal Showa, Surya Phrama, Vipul

1. Trade in equities first and only when confident broaden your portfolio to include Derivative (Future and Options) and Commodities.

2. Love your money not the stocks you own. It is important to sell stocks to realize your profit. There is nothing called “notional gain” . It has no significance.

3. Remember one simple thing  - Higher the P/E of a stock, lesser the chance for you to make further money in it. Exceptions are there - but why to work with exceptions. There are thousands of other stocks available at lesser P/E and which might be profitable- why not keep them.

4. Equity as an asset class is historically proven to be the best asset class in terms of returns. So be  an investor, even if you are a small investor. You can have a small portfolio.

5. Believe in gravity - Anything which goes up will come down and vice versa. A Stock which has risen too fast too soon will come back.

6. Avoid bringing fresh cash to save your ailing stock. Averaging might not be the best option all time. Discipline wise its nice to have a pre-determined level of money you will bring on the table for investment in the Stock Market. Stick to it - unless there are exceptional situations.

7. Risk and Reward are directly proportional - higher the risk , greater will be the reward. It is easy to get lured by riskier asset class (derivative), resists the temptation unless you are sure of what you are doing.

8. Know your entry and exit points - When you are buying a stock, have a decision right away as to at what percentage upside you will sell it. And a 5% number here is not less. It is important to make money rather than expecting it to rise 50% and in process be sitting on losses.

9. Safety First - For whatever you do. Keep your Plan-B ready. What if, if the counter does not move the way you expected.  What you will do if you suddenly need liquidity to support your other expenses. How much of your networth is exposed in the market. Do you know the exit routes (read hedging routes) in case your trade direction is going wrong (remember, Abhimanyu - he did not knew exit path from the war field).

10. It is fine if you missed run up of the market from x to 2x. What did you lose actually - nothing. It is important to be safeguarded against potential fall - once you are invested. Because here you will lose.

11. Have small - small milestone. Like you brought 10k today. You want to see it 11k by end of week. Do not look beyond, I will make it 20K by end of this week. It is not going to happen.

12. Listen to everyone but do what you want - it is your money after all. Before buying - ask why you are buying, what highs you expect, when you will sell, what if, if it falls 5% just after you buy, if the P/E > 20,  is the P/E greater than its peers (does it deserves to be there), is there a corporate action coming up for the stock, who all are the promoters, what has been the track record of the promoters, look at the chart of last 2 years on www.nseindia.com (see how the stock moved over the years), is the stock close to its 52 Week H/L etc.

13. So called experts speaking on various portals and media have vested interest interests in particular stocks. There comments may be biased. There are just too many of the experts who hold no - accountability if their calls goes wrong. Additionally, for the same stock at any given time you will always have a +/- opinions from two different stocks which will confuse you further. Use their talks, interviews and data to help your own research rather than follow them blindly.

14. Just because your friend made 10k yesterday did not mean that you will make 10k today. Just because a Stock X rose 10% yeterday does not mean it will repeat it today.  Just because your friend told you to buy this - you are not going to buy it. Just because your friend looks smart in dealing with his portfolio - it doesn’t mean you are as smart or as bigger a fool. Bottom line in all this - how on heavens are you ever going to know if your friend is telling gospel truth in the first place.

15. Begin with a small sum of money (say 5% of your networth) and see how much and how fast you are able to grow it. Worse case scenario is your 5% shrink 50% to 2.5%.  Market is not going at Sensex zero anytime in history. Its not the end of the road. You would have taken huge learning out of this loss. Turn your 5% as many times as you can. Buy- Sell - Buy - Sell (keep churning). If something is not going up - sell and move over to another.

16.  Just to make sure we are just not talking concepts but bit of researched number as well - will put forward a guidance from Benjam Graham (writer of the Intelligent Investor). His  suggestion is that you multiply the P/E ratio by the P/B (price-to-book) ratio and see whether the resulting number is below 22.5. If it is then it is generally a safe investment more often than not.

17. Good luck and Happy Investing.

Previous Week

The Indian equity market, after three weeks of consecutive rise fell during the previous week due to weak global cues, mainly from China.

However, the week started on a positive note, after witnessing a highly choppy and range bound trading for the next couple of days, the market fell significantly during the last couple of days, losing an average of 2.5% each day.

On a week-on-week basis,

• BSE Sensex plunged 510 points or 3.25% to close at 15160.24
• Nifty ended at 4481.4, down by 155 points or 3.3%.

Better-than-expected results for most major companies across the globe so far have been supporting the market to remain strong.

During this week, however, indications that China may restrict lending, deteriorating monsoon in major parts of India, some weaker-than-expected global economic data and a very high valuation for the market attracted profit booking. This further accelerated, as both important indices breached some important levels.

Auto, Realty and Metals remained among the top losers in the previous week.

Week Ahead

After rallying significantly for the last five months with only one correction in between, the market is likely to pause for some time. We saw this during the previous week.

It would be interesting to note whether the previous week’s fall was only a breather or it has the potential to drag the market further. This would be clear only in the coming week.

The recent rally was mainly driven by better prospects of economic recovery in emerging markets, mainly China and India.

Some indication of restrictions in lending and over-valuation of some sectors, coupled with skepticism on the latest consumption of certain raw materials raised concerns over the potential of the rally. This attracted profit booking.

Though some occasional buying may emerge at lower levels, the market is likely to maintain its weaker undertone in the coming week also.

Question 1(a): Given the business projection of Infosys that the coming year will be difficult for both sales and net profits, what is your suggestion for IT sector stocks?

Infosys traditionally has been a conservative management. It guides with lot of safety buffers. However, there is no doubt that high margin pricing of Infosys projects will be under maximum pressure during this downturn and there would be bigger negative impact to its bottom line at least over the next 3 quarters. For Infosys stock, Rs 1500 might be an upper limit for this stock to break – at least next 2 quarters. So Rs 1100 to Rs 1500 becomes a trading range for Infosys stock. Over a long time and those deciding to park bit of their retirement funds – Infosys remains a safe rainy day stock. But no fast bucks anymore with this counter.

TCS stock looks better, because TCS has strength in large deal conversion and can thus take a bigger pie of the large outsourcing deals. Plus the 1:1 bonus is not bad in this business environment and apart from forex losses predominantly on account of hedging mismatch TCS suffered in the troubled last quarter. Going forward because of its pricing, size and global presence TCS looks better positioned to offer same service to customer at less cost and is the likely vendor to thwart new entrants like Tech Mahindra despite the successful Satyam acquisition.

WIPRO will have to remain content with the 3rd spot, because its going to b very difficult to beat either Infosys or TCS. Moreover a closed management style does not give enough confidence to player and as recession goes deeper. Wipro has posted a Q4 performance that looks okay, but Azim Premji himself acknowledged the need for better deal conversion in the analyst conference yesterday. Unless Wipro rapidly comes with strong business growth strategy, chances are high that it will be squeezed on various fronts by different players.

IT Taxation also plays a key role for investors. Renewal or not renewal of tax holidays comes up as a major incident at the dawn of 2010, and the Indian IT sector will see de-rating in case the tax holiday ceases. However, seems IT companies by showing its internal pain will bully the government to at least give a temporary respite on tax front. However, there is no doubt the erstwhile bellwether sector ceases to be one now.

1(b) Is there a place for well performing mid-cap stocks like Polaris?

Patni and HCL (esp. after Axon) will remain hot picks. Polaris is also doing well in its BFSI space. These Tier-2 companies might outperform Infosys, TCS and Wipro. The management of HCL is aggressive and that will help in these trying times.

1(c) Which are some of the better options than IT stocks in the current market?

Patni, HCL, TechM, might be better options. Mphasis can be avoided.  Rolta will remain traders top pick along with Educomp.

Till lightning struck Satyam, it was a dream company to work with and a dream stock to hold. Infact this counter had huge investor following. Not anymore.

Even the smartest has been locked into a loss of un-imaginable proportion as Satyam dived to an intra-day low of Rs 6.20/- from its lofty heights. Many have already exited the counter, however plenty more (mostly retail) is stuck and is directionless. This post is exclusive for the trapped investors who have already seen an erosion of 90% of valuation of purchase levels. The good thing however is that there is not much left to lose.

Based on which our investment advisory recommends a “HOLD” on the Satyam counter.

Holding on to Satyam is advisable because of following reasons:

The government has no other option in an election year but to bail out the company. It has taken the first step very swiftly because there are lots of Indian citizen families associated with it. Satyam had been a bellwether company and its complete collapse would have had catastrophic repercussions. It would have thrown the Indian regulatory mechanism and disaster recovery mechanism in bad light.

The government has been quick to put in place a new board to ensure continuity of business. The new board is very capable and comprises of well known names across the industries. There are certainly no doubts on their experience, expertise, capabilities and intentions.  By including a banker, government might have given the company its best chance to arrange funds. Liquidity is the major concern as Satyam fights with destiny and Parekh is best place to arrange the funds.

The immediate task of the newly constituted board will be to find USD 120 million (Rs 550 crore) ‘bridge finance’. However, the exact fund gap in the balance sheet will be arrived only when a re-audit of numbers is carried out which will be tough yet possible. Bridge finance could be money provided either as a credit line by the Government or banking institutions at concessional rates. Presence of Parekh here will be very critical. He has experience in such matters, will be able to address the issues quite competently and will be crucial for tapping funds from private equity and private and public sector banks for the company.

Karnik is on board prima-facie to get Satyam’s business back on track. He will be the person in charge of reposing confidence in the Clients of Satyam because they are the silent ones who hold the key to Satyam seeing daylight again. Any amount of federal intervention will be of no use unless Client repose their faith in continuing business with Satyam. Some Clients may still desert Satyam but Karnik role will be pivotal in retaining the majority and major ones.

Achuthan will re-establish proper accounting standards in the IT Company which the company so desperately needs. New auditing team has already been announced and it is expected that KPMG and Deloitte may be the right pills at the right time. PwC deserved to be removed and has been rightly shown the door.

Thus we can safely say that Government has done well the first step of putting the right team with diversified capabilities.

The unknowns however would remains as below:

1.     Is there more mud then what has been brought forward by the confession note?

2.     What if, critical Satyam delivery team deserts company?

3.     Client exodus.

4.     Company splits and gets sold in parts – in which case shareholders stand to get nothing.

5.     The investigations into the scam turn political and lead to a long legal tangle.

We however remain confident that from current levels exit is not a good option, and if one is bold the loss can be substantially minimized.