Wednesday, July 27, 2011


Well, the RBI surprised again and came out with a 50 basis point rate hike while the consensus was 25 basis points with some of the real hopeful bulls even expecting a pause from the RBI. Now the one message that the traders should take from this move is not to second guess the RBI based on the views you see on TV or read in papers. The RBI will do what it thinks is right depending on the data and not what the economists/markets expect it to do.

Anyways, I am not writing this to debate whether the RBI move was right or wrong as that debate will never settle one way or the other. The real issue now is to live with it and how should one go about trading stocks now.

Let’s start with the first obvious sector, the banks. Now there are two schools of thought here. One says the 50 basis point hike actually is better than 25 basis points as now the banks have no option but to pass on the hike and protect their margins, while in case of 25 basis points, there would have been a bit of internal debate on passing the rate hike. The second school of thought says the environment for banks in general is quite vitiated now and the RBI will not rest till the credit growth comes down to its comfort zone. My sense is its mix of both. Over the next 3 months, you will see varied moves in banking sector with some banks rallying over 10% while other falling equally sharply. And in case of banks, it’s not just about interest rates any more. It’s got a lot to do with asset quality and a careful study of some of these banks should help one identify the winners and losers.

Now let’s move on to Auto stocks. Clearly the most vulnerable one right now is the commercial vehicle space as that is most sensitive to interest rates and we have already seen some impact on sales of companies like Ashok Leyland and going forward, this space may remain under pressure for some time. As far as passenger car space is concerned, over there as well, this is likely to hurt sentiment, especially in the entry level segment where a lot of middle class families aspire to upgrade from two wheelers to cars. Plus, the competition in car space has been quite intense and that too will play its part. The two wheeler players may actually come out least impacted because the incremental EMI hike will still not be out of comfort zone.

What can one say about real estate? It’s been easily the most hated sector ever since the big collapse of Lehman Brothers and the bear market that followed in India after that. And while rest of the market has gone to within 20-30% of previous peak, this sector is still 70-80% off from previous peak. And the biggest dichotomy here is that the property prices, especially in urban cities like Mumbai and Delhi are now higher than late 2007/early 2008. But clearly, the market knows that some of these prices are artificial. The builder lobby is strong, they don’t want to cut prices and the buyers are refusing to buy at such levels. Ultimately, I think it’s the developers who will have to throw in the towel and at least some of them would do that to stay afloat. The stocks that will survive and may still thrive here are the one where companies have zero or low debt like Oberoi Realty, Phoenix Mills etc.

Amidst all this, there are individual stocks which one should focus on, that of companies sitting on massive debt which should be under pressure and at the same time those sitting on large piles of cash, which can be used to buy distressed assets. Let’s first take a look at some of the companies sitting on a mountain of debt.

Sakthi Sugars: Has one of the most startling statistics. It has a market cap of only Rs 125 crore, but last year did sales of Rs 3,000 crores. It sits on debt of nearly Rs 1300 cr and paid over Rs 230 crore as interest cost. So forget about debt/market cap, it’s interest outgo is higher than the market cap. It made a pre-tax loss of Rs 117 cr last year.

Varun Shipping: Total market cap of Rs 364 cr and debt of almost Rs 3,000 cr. Again, it paid an interest of Rs 216 cr last year and pre-tax profit of only Rs 17 cr on income of Rs 837 cr.

Other stocks that will fall in same category will include Viceroy Hotels, Alok Industries, Aban Offshore, Vishal retail, Bharati Shipyard, Mercator Lines, JP Associates, Hotel Leela, Patel Engineering and Videocon among others.

But in every adversity lies an opportunity and this is the time when cash rich companies tend to do well. Some of the companies with high cash would include Phoenix Mills and Oberoi Realty as I mentioned earlier apart from Pfizer, Blue Dart, Info Edge, Castrol, Bharat Electronics, Divi’s Labs, HUL among others.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.

Monday, July 25, 2011


What a difference one year can make? In June-July last year, Bharti Airtel was easily the most hated stock; it was making a new 52-week low almost on a daily basis. Its market capitalization fell to below Rs 1 lakh crore mark and as hard as it may be to fathom, the country’s largest telecom company did not feature in the top 10 by market value in the benchmark Nifty index. Yes, the same stock which in the heydays of 2007 was neck to neck with ONGC for 2nd spot in market capitalization charts behind Reliance, was not even in top 10 by last year of June.

A year on, and Bharti has given 59% positive returns from those lows and has easily been the best stock in the index. So obviously, the question now is should one still buy the stock or has that buying opportunity passed by?

A few points must be taken into account while making this decision.

1) The combined market capitalization of the top two telecom companies in 2007 was Rs 3.50 lakh crores, today it stands as Rs 1.75 lakh cr, exactly half of the peak. But in 2007, we were in an unqualified and raging bull market. And telecom companies have seen bad news hitting them from all corners, be it the regulatory environment or the competitive scenario.

2) Bharti is still at number 7 among Nifty stocks by market capitalization. The market capitalization of a lot of stocks has gone back to the 2007 levels or even higher than that in some cases.

3) While Bharti’s revenue has increased nearly 40% from Rs 27,000 cr in FY08 to Rs 38,000 cr in FY11, the net profit during the same period is up only 18% to Rs 7,700 cr due to falling operating margins as a result of the tariff war which the industry has faced over the last 2 years. So the Price/earnings (PE) multiples you apply to Bharti may need to be scaled down from those days.

4) Bharti was trading at 30x forward earnings in its peak, which was clearly in frothy zone, now it trades at 18x forward earnings.

5) Over 1 year, Reliance Communications has fallen 50% due to obvious reasons and some of the funds with a mandate to invest in telecom would have had no option but to take a look at Bharti during this period.

Now let’s look at the ownership. In March 2008, Bharti was 25% owned by foreign institutional investors (FIIs). By March 2009, that number fell to 20.7%, then further to 18.4% by September 2009, then 18% by March 2010 and finally 16.6% by June 2010 and call it sheer coincidence or FII influence on stock prices, it comes as no surprise that the FII ownership in Bharti bottomed at the same time as the stock bottomed out. But despite the big outperformance, the FII ownership has still gone up nearly 100 basis points to 17.59%. Also, the number of FIIs that have Bharti in their portfolio now is 640 vs 831 in 2008.

While big debate for Bharti has been related to tariff, the one point that’s being missed here is the penetration level achieved due to these low tariffs. Just look around you, everyone from your maid to your driver and the garbage cleaner are all carrying a mobile these days. The economies of scale are quite large here and this penetration could only get deeper going forward as India’s middle income class is among the fastest growing groups in the world.

Now I am not saying one should buy Bharti today, clearly it’s an overbought stock in the near-term and index stocks will not just keep going up on a daily basis. But what I am trying to tell here is that just as some of these stocks can surprise on the downside when they are in an unqualified bear market like Bharti was between 2008-2010, the upside potential too could surprise in a bull market which Bharti clearly is in. So probably, any dips in Bharti would represent a good buying opportunity.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.

Thursday, July 21, 2011



I was truly overwhelmed by the response yesterday to my article on Crompton and since a lot of people have asked me what to do with the stock now? I just thought it was worthwhile to come out with a follow up piece.

First up, as I expected and wrote in my article yesterday, the brokerage downgrades have come and just take a look at these downgrades.

- Macquarie has cut its target from Rs 347 to Rs 158 (54% cut)

- HSBC has cut its target from Rs 330 to Rs 205 (38% cut)

- JPMorgan has cut its target to Rs 135 from Rs 300 (55% cut)

- Consensus target of Rs 166 from Rs 322 (48% cut)

- Consensus EPS target has been cut from Rs 17 to Rs 9

Too bad, they have come far too late for those invested in the stock.

Anyways, let’s shift focus to retail investors and what should they do with the stock now? Keep in mind Crompton Greaves is an F&O stock and over last 2 days you have seen almost a trebling of Open positions in futures segment of the stock and with short traders sitting on so much money, there is bound to be a short-term relief.

This relief rally may well take Crompton to above Rs 200 mark in the near-term but honestly that’s an opportunity for those still stuck in the stock and especially those who bought the first fall and bought around Rs 210-215 zone. And that’s because as I wrote yesterday, the over-ownership should now correct and some of the large funds will dump the stock, so the supply pressure on the stock is likely to be relentless.

Now if you are an investor with a 10-year portfolio view, it should not matter to you whether you buy now, or you buy 20% cheaper, because you want to buy it if you believe it will be a multi bagger over next 10 years. But what should you do if you want to buy with a 2-3 year horizon?

Over the last 8 years, I have studied some of these blue-chip companies going through fundamentally weak period and believe me; the extent to which some of these stocks can fall can really amaze you, most recently SBI falling nearly 40%, sometime back L&T falling nearly 40% and these are among the bluest of blue-chips one can imagine. So if you are investing from 2-3 year horizon, absolutely stay away from this stock. Wait for it to find its feet, let it come out with 2 quarters of stable earnings and then take a plunge. If you miss the first 20% of rally, never mind, there is a risk of losing 50% trying to catch this first 20%.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation

Wednesday, July 20, 2011


First up, my apologies for not writing for so long, I don’t have any real excuse, can assure that I would be far more regular now.

Now for the last 2 days, the stock that has hogged limelight is clearly Crompton Greaves, down nearly 15% on Tuesday and as I write this, it’s down 15% today as well. What amazes me is how the analyst community is shocked and how investors are dumping the stock as if something unpredictable has hit them.

I would just like to present some data first. We all know how steep the fall was for Crompton Greaves after Q4 earnings and one would have been forgiven to assume that there has been massive offloading of the stock. But just take a look at the following numbers

- Institutional holding at June end is 41.5% vs 42.4% at March-end
- Institutions pared only 0.9% stake in Apr-June quarter
- FII holding at 21.4% at June-end vs 21.7% at March-end
- Domestic insurance cos’ stake at 5.25% at June-end vs 5% at March-end
- Mutual fund stake at 12.7% at June-end vs 13.7% at March-end

How this stock remained in such an overbought zone is beyond my comprehension.

Now one more startling fact. The consensus price target from brokerages on the stock was Rs 323, with some bullish brokerages even predicting Rs 347, and the most bearish I saw was Rs 240. Most of these analysts believed it’s a blue chip and Q4 was just a one off and how last quarter was a good buying opportunity. As I write this, the stock is at Rs 176.

Just take a look at what one of the most respected foreign brokerages wrote after the conference call today.

Brokerage: “Biggest negative is the fact that there is no one time costs in the results, belying street hopes that it was largely one-offs”.

Now was the street really hoping that it was a one off? Didn’t SM Trehan, the outgoing MD of the company in last quarter commentary say that this pressure will continue for two more quarters? Where was this hope for street coming from? Is this the case of you being more loyal than the king himself? Come on, one of the most respected CEOs is saying I will disappoint you for 2 more quarters and you still believe that everything was hunky dory? In fact SM Trehan sold all his 1.8 lakh shares during Jun 29-July 1 at an average price of Rs 260. Since then, there has been a clarification that Trehan sold his stake after taking due permission from the company secretary and before the trading window closing. Nothing wrong with that, as outgoing MD last quarter, he himself didn’t have the confidence on the company for next couple of quarters. Why did the investors and analysts have the confidence despite this data?

Some of these analysts are paid top notch dollars for being so far behind the curve. Now, interestingly some of them will downgrade the stock with ridiculously low price targets and may be that is where stock will bounce back. A case in point being SKS Micro, where when everyone turned bearish with sub 200 price targets, the stock rallied nearly 80%. Not to suggest the same will happen with Crompton Greaves as it needs to shed a lot of this over-ownership.

The biggest lesson a shareholder can learn is not to take these brokerage reports on face value. Having committed to a view, they are slaves of that view, they are in total denial mode and it doesn’t help when your hard earned money loses 30% of its value in 2 days despite the warning signs which were presented to you by the management itself.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation.