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

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.

1.      Reliance (RIL)

Trade on the long side for around 8-10% gain from current levels.

Buy – Current levels 1140-1160

Sell – 1170

Stop loss – 1130

Target – 1180

Reason- Good set of numbers beating expectation,

2.      Bharti Airtel

Trade on long side for 4-5 % gains from current levels.

Buy – Current levels 605-615

Sell – 627

Stop loss – 602

Target – 632

Reason – Excellent set of numbers, Telecom least effected sector in recession.

3.      DLF

Trade on long side for 5-6% gain from current levels

Buy – Current levels 160

Sell – 172

Stop loss – 154

Target – 176

Reason – Oversold position, Excessive short position. Open interest very high on charts.

Investment tips for today.

Short term investors - Stay away.

Long term investors – Invest in Reliance, L&T, State Bank, BHEL, Powergrid, Tata Steel.

Captioned story means a lot to one and all. At a time when global market seems to be on a bear hug – trillions have gone in the drain.

As we step into recession, blue chips are available at prices which were unthinkable about 6-8 months back. Yes, we have indeed stepped into a market where a year is an eternity. A moment of shock and awe is re-writing the support and resistance levels.

India has fallen behind its peers on account of poor IIP numbers, global slowdown, meltdown of commodity space and now Satyam’s corporate governance scandal.

The valuation of the entire Nifty fifty pack, with no exception has been re-written. PE index of Sensex and Nifty has been well and truly revised. What’s next? All experts’ say- that there is some pain still left in the market – but on the face of it, they seem to be following a herd.

Existing macroeconomic fundamentals thus suggest that the experts may be right, but gravity too takes a stone only to ground and not beneath. Speaking on an Indian context Reliance, L&T and the nifty-fifty pack is today available at throw-away prices. IT has been hammered beyond recognition – but fundamentally nothing much has changed.

Indian banking system remains resilient and domestic demand is still robust. GDP numbers have taken slight hit – but that’s understandable. Today, India still gives a window of opportunity to investors which is different from the dynamics of an US market or that of the highly export centric Asia-Pacific rim. Fundamentally, India still remains a growth story with minor aberration in form of current turmoil it is confronted with!!

While it may not be the right time to park the entire investment portfolio now – but we believe that for sure, it is the beginning time. Retail investors, who missed the ferry ride to 21K Sensex, can start booking the passes now.

Stocks like Reliance Industries (RIL), L&T, BHEL, ONGC, Tata Steel, and TCS are looking very attractive on valuation – leave alone the technical charts and other such pointers.

While, it is understandable to note that many retail investors have lost aplenty in the current bear hug (or atleast are exposed to heavy notional losses), but it is time to get the portfolio right.

There are stocks in portfolio like Hindalco for instance which has no value left in it – as it struggles to make payments towards its Novelis acquisition, there are further downside expected. Its time to take a call on such counters and get the locked cash in hand.

Inventory is a bad word, but Inventory turnover is a good word. It is all about the resource one has and how one uses it. A resource tied to a stock which has no near time upside is locked in inventory. If the same resource is turned 4-5 times a year in various portfolios it is serious money. So take out the locked funds and move into a running stock – say an RPL for instance. Turn the fund twice over the next six months and there would be sizable return in the taking. Yes, this is a “trading approach”.

A portion of the fund can also be apportioned in momentum stocks like JP Associates, Nagarjuna Fertilizers, Power Grid, TTML, Idea and RNRL to make the inventory roll-over fast.

Lots of news is expected in the current and next quarter. Obama’s gift check, an Indian election summer, a populist budget, a hawkish audit regime and a tired bear. These are the news a momentum stock would love and dance according to the tune.

As an investment advisory portal our aim is to give value to our readers and clients in making positive gains. We used to advise investors on specific stocks and its holding periods- 6 months, a year or sometime even more. While this advisory service is not available at the moment, we want to use this blog post to suggest the inventory turnover approach, where an investor begins by say a Rs 50k ticket and in the first 3 months targets a 10% returns and then compounds the proceeds to another 10% in the next 3 months to get a 21.10%, six monthly return. It will require plenty of smart work – but we sincerely believe that it’s achievable and therefore we are approaching the time to bring cash in hand to counters.

The golden rule remains- invest when the market appears dead, make money like a trader on a dead cat bounce and exit just before the euphoria becomes too good to be true.

IT industry after the Satyam saga looks vulnerable , and the big question on many minds is this: Is the IT dream over?

We don’t think so!  The Indian IT industry has established itself as one of the front-runners in ‘real’ profit margins, and IT players like Infosys, TCS  and Wipro have taken the standard of corporate governance to  the top.

This industry has set examples to other sectors and let’s accept it – it lies beneath the foundation of so called rise of “The India Inc”. So one scandal can’t turn this industry into ruins. In fact today’s market showed that it seems the rivals companies are likely to gain on account of Satyam fiasco.

The investors are reacting to the fiasco and shifting to its peers. In the short term the Indian IT sector may be affected by this episode but it will finally come out on winning node – at least that’s the long term story we can think of which is self sustainable.  

Some changes and improvements will happen as accounting and auditing will get tighter and customer confidence levels will need further checks and balances but all said and done, all is not lost as far as this darling sector is concerned.

However, companies need to work constantly on their reputation, should be more transparent in their disclosures to regain the confidence of domestic as well as the overseas investors and clients. FDI and FII investor might hold for few weeks may be months but ultimately they will make a beeline for these companies esp. now that these companies are at very decent valuations – down significantly from its lofty days.

It is being discussed in various parlays – that is Mr. Raju’s confession of 3% gross correct. No way. For a company whose significant portion of revenue (in excess of 40%) comes from its Enterprise Solutions (SAP) practice – which is relatively high margin service – the confession is another big lie from the Satyam’s basket.

It might be an accounting juggernaut to however find out whether the delta money of the actual and confessed margin was siphoned. As billing rates got reduced, thanks to the economic downturn – there has been a hit on gross margin by a couple of percentage points but in no way the magnitude as stated in the confession note.

Today, an Infosys or a TCS is sitting on decent networth with abundant cash reserves to seal M&A deals. This was evident from Infosys (a zero debt company) going for an all cash acquisition of AXON. It is another thing that the deal finally went to its competitor HCL who benefited from the due-diligence done by Infosys, and offered a higher price (funded by debt), but at least such attempts show strength in Infosys balance sheet.

So, we believe that investors should hold on to their positions to this beaten down IT sector, which has only one way to go now – North!

However another defining questions needs to be answered: What should Satyam investors should do? Hold. Stay invested!

Because what more can one lose? Satyam’s  big investors like Aberleen , Swiss Financial, Fedility, Morgan Stanley have completely exited the stock. Today the stock fell to its nadir. It touched the intra-day low of 6.30 but then we saw some buying and it finally settled on to 24.

This move is solely based on common sense and not on any numbers per se – because there aren’t any “reliable” numbers out of the Satyam books anymore –unless complete recast of financial statements is for the last 5 years, and that will take time for sure.

We are of view that since the Satyam stoc is already ruined and nothing can come out of this stock, so why should we sell it? When the investor has taken the loss of nearly 90% they can’t lose further so keep the remaining stocks it can go upward only, condition if only it is bailed out by government itself or some other company – which we think it will be, especially in an Election year when the federal government has to show its helping hand towards the 53k hapless employees and their families.

The caveat however lies that should Satyam disintegrates into pieces and vertical wise take over starts to happen then probably the existing shareholders get nothing – but anyway what they are holding to is anyway around 5-10% of the investment. It is worth the gamble and should a Big name company decide to associate itself with Satyam at scrap price then the very foundation of Satyam “could” potentially leap frog the stock to three digit levels in the medium term.

Our advice to retail investors is to stay invested BUT do not even think of adding new money on various news and rumors on this company because we believe there will be aplenty. Brokers and Traders will aim to profit from this stock may till the air of doubt settles on the scandal. So don’t add any new investment.

The Message we want to communicate through this post is that – One Satyam should not shake an investor who might still believe that equities as an asset class is the best way to riches.