IS SEBI WATCHING THIS DAYLIGHT ROBBERY?

Fresenius Kabi! Rings a bell? It should, it was the first company that burst the bubble of MNC delisting hope story by opting for an offer for sale to reduce promoter stake. Basically, according to SEBI guidelines, promoters need to either cut stake to below 75% or delist the company. Fresenius Kabi had 90% promoter stake and was on top of the list of punters taking bets on top dollar delisting price.

Now take a look at the set of events. The stock first doubled from 85 in December 2011 to Rs 170 by April 2012 on hopes of deslisting. Then, the promoters opted for an OFS instead of delisting and the stock fell to Rs 80. The OFS took place at Rs 80 but what was interesting was that a large chunk of OFS was subscribed by 4 merchant bankers. RBS Merchant Bank subscribed 30.5 lakh shares, Macquarie bank 29.65 lakh shares, Morgan Stanley 25 lakh and Nomura another 23 lakh for a total of 1.08 crore shares.

Now this is not illegal, and at no point am I accusing any of the entities here but look at what the company is doing now. Its come out with a voluntary delisting offer with a floor price of Rs 130/share. I am not in the business of predicting these developments but if all these merchant bankers do tender at 130/share, that will go a long way in the company being delisted. Remember, with the current float of 19%, the company now only needs 9.5% stake to delist and keep in mind, it did an OFS of 9% to cut stake from 90% to 81%. Do the math here. Its far easier for company to accumulate 9.5% after having given 9% stake in an OFS to select entities than it was to garner 5% when the public float was 10%. And I won't be surprised if all those who were allotted shares in OFS actually do tender in delisting offer.

This stock was seen as undervalued at 180/share when delisting buzz was alive. Just imagine, what a daylight robbery it would be if indeed the promoters manage to delist the company at Rs 130/share. Is there anyone looking at the plight of minority shareholders? This is all being done within the law, but sometimes spirit of the law is ignored in just following the letter of the law.

My other fear is that once this delisting is through, this will provide perfect precedence to some other promoters on how to delist the company at throwaway prices.

IS THIS INFOSYS OR SOME MIDCAP COMPANY?

Let’s be blunt here. Infosys is not the respected company it has been. It does not deserve to be called an IT bellwether anymore and clearly the current management is absolutely no patch on the kind of leadership it had some years back.

Just imagine this kind of performance under Nandan Nilekani and Mohandas Pai. Even if they would have come with an occasional shocker, they would stand up to tough questions and not stand behind the comfort of their own corporate communication manager asking them silly and easy questions.

Look at the guidance. 6-10%. Why not 2-14%? That also has same median or even 0-16% for that matter? Let’s be clear here – Infosys guidance has ZERO meaning for the market now. It does not respect the current management and it should not do it in near future too.  And they haven’t declared EPS guidance because they have no clue on what will be their pricing, margins or anything for that matter. And what will be amazing? Expect TCS and HCL Tech to rub salt into their wounds over next 2 weeks by maintaining their standards (just like Infy maintained its standards).

And one word for the analysts too who keep saying this is a great, under-owned stock. Under-ownership? What under-ownership. The FII holding is at multi-year high, mutual funds have not sold much. The only selling has come from LIC and insurance companies which had their own reasons as I wrote in my previous blog.

But, my apologies to LIC – they turned out to be the smartest investors, even if it’s by default. They sold 80 lakh shares at around 2900 Rupees (something which the stock will not hit for at least 2 years)

Nine months back, I turned positive on Infosys. I had a strong feeling that it was coming out of a rut and a patch of outperformance was coming. I was right for last 9 months but today’s event has changed it all. The company has revised the clock backwards by a good 2 years and whatever confidence it built over the last 6 months has been destroyed.

Be under no illusion of stock finding bottom at 2300 or so. For me even if you assume an EPS of Rs 170 for Infosys, you should apply a multiple of 10-11x because this is now just another midcap kind of volatile companies which we have plenty of in this market. The stock doesn’t deserve to trade above 1700-1870 given the circumstances.

IS LIC BEING FORCED TO SELL BLUECHIPS?

Its Earnings season again, and as usual, companies are reporting the shareholding pattern changes to the exchanges and this gives data hungry people like me some fodder to feed on. So let’s get started. Of course, this is still early stages and we will get more data as and when more companies come out with this mandatory requirement.

Around 10 of Nifty 50 companies have reported this data so far and to me, what really stands out is the kind of selling LIC has indulged in.

LIC has sold nearly Rs 3,000 crore of their investment in 6 Nifty stocks – Infosys, HDFC Bank, HUL, Cairn, BHEL and Bank of Baroda. To be fair, out of these, it has actually added investments worth Rs 540 crore in India

The largest selling from LIC is in case of Infosys. The corporation has sold 80 lakh shares in April-June quarter worth Rs 2,200 crore. Of course, they made a bit of killing on it since the stock came out of a bit of a bear market post its earnings and had a one way rally from Rs 2,200 to around 2,900 and LIC had been accumulating some of these shares at very low prices.

LIC has also sold nearly 1.4 crore shares of HDFC Bank worth Rs 260 crore; 1.3 crore shares of HUL worth Rs 650 crore and as I mentioned earlier, has bought 1.8 crore shares in Cairn India worth Rs 540 crores.

What really stands out is LIC action on BHEL and Bank of Baroda. The corporation has sold shares worth Rs 400 crores in these 2 underperforming PSU stocks.

Now, like everyone else, LIC is in stock markets to make money, preserve profits and cut losses – so nothing sinister in it. But then, you associate LIC with really long term investing, especially in blue chips and any kind of selling will attract suspicion – more so with the market being so dependent on institutional flows.

The big question is – would LIC have still sold so much in secondary market if it didn’t have to face an aggressive Govt calendar of PSU divestment? And this question becomes important at a time when LIC is actually pleading with regulators to remove the 10% cap on company specific investments

DECODING THE FII DERIVATIVE DATA

If you thought Monday’s FII action in derivatives was eye popping, Tuesday would make you fall off the chair. While on Monday, FIIs net bought Rs 2,200 cr worth Index options (mainly Nifty) with Open Interest  going up by 73 lakh shares; On Tuesday both these numbers almost doubled with net buying of Rs 4,000 cr along with an addition of a massive 1.5 crore shares in Open Interest

What really stands out on both days is the massive Open Interest build-up at deep out of the money strikes. For example, in Tuesday’s trade, 5600 Put added 26 lakh shares while 5500 Put added nearly 15 lakh shares. For an index, which is trading above 5900, we are talking about strikes which are a good 5-7% off current levels with a relatively short series (only 11 days left in current series)

Tuesday also stood out in terms of futures data from FIIs, with a net selling of nearly Rs 500 cr and an Open Interest build-up of nearly 6 lakh shares. For the first time since budget, we have seen short positions in Nifty.

Now, what does this data mean? Well it could mean 2 things – first, some FIIs are buying in cash markets but given last month’s experience, they want to be completely hedged. And second, some FIIs have taken directional call on the Nifty with a view that the short covering bounce is mostly done with and an inherently weak market would now complete its logical move towards the 200 day moving average. If it’s the first case, that’s as healthy as it can get for the market since over-hedged markets would normally inch higher. But if the second scenario plays out, it may actually make February look relatively better.

What was also interesting on Tuesday was the sharp intra-day recovery between 1:30 to 2:30 and an equally sharp drop again between 2:30-3:30. There is an old saying “Amateurs open the market and professional close it”. Normally if a market closes near day’s low, it tells you that professional traders are happy keeping their shorts overnight. What was also interesting was that the last hour selling was not accompanied by added weakness in global markets. In fact, European markets had turned in the green.

Keep in mind the market had a crunching 7% fall from its February high of 6110 to the budget day low of 5670. That’s a total of 440 points. At Monday’s high of 5970, it had reclaimed 300 points out of that. We all know that bear market rallies are sharp and at times give an impression that a new bull market has started. But until the Nifty crosses 6,000 and makes a move towards previous peak, this just remains a sharp pullback in a structurally weak market. One thing is certain; the screen is not looking comfortable, especially for the high beta midcaps and to me last week remains a sucker’s rally. I would be happy to change my view if the Nifty rallies this week.

Disclaimer: I reserve the right to be wrong. If I was always right about stock markets, I would own some island in Caribbean.

SUCKER’S RALLY ON – BULLS BEWARE

The word on the street is that the worst is over for Indian markets. Budget coinciding with expiry was seen as a climatic event with selling reaching its exhaustion. There are a few data points which actually support that view.

First, the market has found support at budget day lows and for last 3 days has been closing at day’s high. Secondly Nifty has rebounded from the mid-point of its 100 and 200 DMAs (daily moving averages). Then of course, the midcap screen is looking much better than it had looked all of February.  And the most important one, the pullback from budget day low has been led by Bank Nifty and strong banking stocks which leads one to believe that the market may be a bit more constructive. Even on the F&O side of the market, the Nifty futures have kept pace with the spot and are trading at decent premium. And while stock futures have shed nearly 10 cr shares in Open Interest over last 2 days, that’s only because of NHPC. Excluding NHPC, stock futures have actually added Open Interest.

However, one look at Tuesday’s FII number would suggest that something is amiss. The way Reliance, TCS and ICICI Bank rallied on Tuesday, I was expecting to see an FII buy number of over Rs 1,000 cr. But the number is actually Rs 220 cr. On top of that, DIIs actually sold Rs 245 cr. On a net basis, institutions sold in cash markets. There was no great buying in the futures markets either and that’s where I get most of my cues.

There was big buying by FIIs in Nifty options and if you see the build-up, it was mostly in Puts. Now conventional wisdom would suggest this is Put writing and hence positive for markets – the texture of the market over last few months has changed with a bias of buying options rather than selling them. Even individual stocks are not giving the comfort that they could be bought again.

Also, let’s keep the global setup in mind, the market has been underperforming the globe this year. While most markets are near all time high with US markets actually right there, the Indian market is still a fair distance away from that. The rupee market has not stabilized at all and is giving an indication that a move towards 56 is on.

So the big question – how to trade this market? The best strategy would be to identify weak stocks and keep building your shorts at every minor pullback. Some examples could be the likes of IFCI, Unitech, HDIL, IVRCL, Welspun Corp, Adani Power. Now keep in mind, some of these stocks could have big intra-day bounces and hence the best way to play these stocks would be via Put options, which are very liquid in most of these stocks. As for Nifty, you should ignore the first 3-4 days of a new series in determining a trend, which would emerge next week. My sense, looking at the internals is that another wave of selling is coming our way and the Nifty may head towards 5550, where the mother of all support of 200 DMA comes in.

Finally - near double digit price targets on Crompton Greaves

Crompton Greaves came out with numbers after markets closed on Friday and the street was 'disappointed', sorry it was 'shocked', especially with the EBITDA performance where for some reasons, the analysts were hoping for a miracle. It has now been more than 6 quarters since my first blog on Crompton Greaves, and I am really amazed how this stock still remained among top picks all through last year.

Thankfully, after yet another 'shocker', some of the leading brokerages have moved their price targets closer to double digits. ML has cut the target to Rs 110 and MS to Rs 108. Over the last 1 year, one thing has stood out despite Crompton's repeated quarterly misses - it remains a very expensive stock. Just to quote from the ML report this morning - 'Stock still trades at 14.4x our FY14E PE, in line with its long
term average (10-yr) despite lower margins, higher earnings volatility and lower
RoEs.' 

And this is where the problem lies. Can anyone honestly predict 2014 earnings for Crompton? The company misses the most pessimistic estimate by a good 40% and here we are working our excel sheets predicting 2014 numbers and talking about how the stock will eventually bottom out. Here is the headline of the Goldman Sachs report 'Near-term pain, medium-term margin improvement thesis intact'. This pain has now run for 7 quarters, by no mean near term. The report also says 'we expect the benefits of cost cutting and restructuring to be visible in FY14E and expect consolidated margins to improve 340bps in FY14E'. Please, you got to be kidding here!!!

I have always maintained that Crompton Greaves at some point will become a buy. But that point is still some distance away. At some stage during this quarter, expect the stock to reach closer to double digits. Its still an over-owned, over-researched stock and while it may make trading gains for swing traders, serious investors should just forget about it till it comes out with 2-3 quarters of good numbers. If the story turns around, this stock will have no problems racing towards 400-500, so it would hardly matter if you miss the first 20% of the run.

TCS VS INFOSYS – PICTURE ABHI BAAKI HAI MERE DOST

Everyone loves TCS right now and it’s almost fashionable to hate Infosys. Almost every second analyst would tell you there is a great pair trade in ‘Buy TCS, Sell Infosys’ and two weeks later would tell you ‘See I told you so’. So let’s just look at some of the numbers and emphasize the extent of TCS’s dominance over Infosys in recent times.

When TCS listed 8 years back, its market cap and valuations were around 20-25% lower to Infosys, which was well deserved despite TCS being the largest IT company by revenues even then. And that’s because Infosys had a long trading history – had been one of the blue eyed boys of the share markets and always deserved a premium over peers.

Over the next few years, Infosys and TCS were in a battle for the top market cap position in IT stocks and the lead changed hands some 4 or 5 times by 2010. It’s in late 2010, that TCS established a small lead and from that point on, it’s just been about TCS.

In late 2010, both TCS and Infosys had market cap of around Rs 1.75 lakh crores. As I write this, TCS has a market cap of 2.47 lakh crores and Infosys is struggling around 1.29 lakh crore mark. Yes, that’s a difference of 91%. In other words, TCS almost =Infosys+Infosys. TCS has more market cap than Infosys and Wipro put together. TCS has more market cap than the rest of the entire IT industry in India excluding Wipro. Yes, TCS is bigger than Infosys+HCL Tech+Tech Mah+Mah Satyam+what you have.

And look at the valuation difference – TCS now trades at 18.5x one year forward earnings while Infosys is available at 13.5x one year forward earnings. This is a valuation gap of 37%, highest ever enjoyed by TCS. So why is the market still so bullish on TCS and so negative on Infosys? Well, for starters, currently Infosys is not seen as a company that under promises and over delivers as was the case till 2010. For last 2 quarters, it’s under promising and hugely underperforming even that promise. The market didn’t like it one bit that they have not given Q2 guidance. If there was one parameter which used to distinguish Infosys over TCS, it was the ability of the management to stick its neck out and give guidance.

But that’s just one part. Look at the quality of earnings and the difference here in the data, apart from the obvious dollar revenue difference which has been the research work of my colleague Diana Monteiro. So while TCS has delivered 3% dollar revenue growth, Infosys has seen a contraction of 1%. TCS has seen a volume growth of 5.3%, while Infosys has seen only 2.8%. Pricing is down 1% for TCS, it’s down almost 4% for Infosys. Attrition is at 12% at TCS and is at almost 15% at Infosys. Go to IITs and there is clear preference for TCS over Infosys from students. What was inconceivable a few years back is now a reality. Lot of students are not even applying for a job in Infosys.

Last quarter, I saw HCL Tech’s CEO almost take a dig at Infosys and their strategy. This quarter TCS has come out with numbers on same day as Infosys. Of course this could be a coincidence or it could be the TCS management way of telling the world, who the boss really is. But as I said in my opening lines, it’s now almost a fashion to bash Infosys and praise TCS. But before you pronounce the death of Infosys, just remember this..........

Infosys is up almost 5525% in last 15 years. In 1997, if you had invested Rs 1 lakh in Infosys, it would be worth Rs 56 lakh now – tax free since its long term capital gain. I am no expert in predicting future earnings but it only takes 3-4quarters for sentiment to change at times. For now, one thing is certain – the large shareholders still believe in Infosys. Despite all its problems, 3 of the largest investors in company viz LIC, Aberdeen and Oppenheimer have actually upped their stake in the last quarter. This quarter’s data will be key to watch out for, 3 months from now.

But this is not a 3 month or 6 month game. This is a long term story. Let’s look at these numbers again in next 5 years. As I said, picture abhi baaki hai mere dost.

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 given to him by his previous employers as part of his compensation