TRADE SETUP - Aug 12,

Aug 12, 2014

Monday was quite a good day for bulls – just for one reason. The market opened with a gap, no that was not the reason I referred to. The fact that the market closed at day’s high was actually the best part about the market. It belied the “Sell on every rally” concern that had arisen after the last 3 days. But frankly, there were some warnings signs as well

For starters, FIIs net sold Rs 163 cr in cash markets albeit on low volumes. The fact that there is reluctance to buy on way down but propensity to sell at highs should be worrying. The other aspect was the nature of rally which looked like complete short covering which can only take market this far. After this, you need strong cash market buying to take markets higher.

This morning, global cues look strictly OK. Yes, the wall street rallied and Europe gained but our markets saw that coming. Asia is relatively muted and that’s the area of concern as is the rally in Dollar index.

So what next for the markets? Well looks like Nifty is still in a broad 7450-7850 range and I would be keenly watching out for which way does the range break. Also, the leadership of the market may have changed from banking and L&T to individual names like Infosys, Tata Motors, HDFC which actually may not be bad news if these stocks can keep the bears at bay.

But, let me reiterate the point I have been making for some time now. Nifty is fine even if it corrects to 7300 or 7000. It’s the high beta space that warrants caution currently.

Stocks to watch:

Tata Motors should rally 7-10% after blockbuster numbers.

IRB Infra: Might see big relief rally on clean chit from CBI on RTI activist murder case

BPCL: Crude has been soft and if currency stabilises this may rally

Ashok Leyland: Any rub off impact due to strong domestic numbers from Tamo as well

GAIL: Possible short covering after yesterday's slam dunk.

WHAT’S DRIVING TATA MOTORS DVR?

I have been pointing out for last one month about Tata Motors DVR. It’s been outperforming almost on a daily basis. In fact, just take a look at these stunning numbers

This year, the Tata Motors DVR is up 55% while the stock is up a relatively sedate 20%. Even this month, the DVR has rallied nearly 18% vs 8% for the normal stock. Now keep in mind, both these stocks are available in derivatives and hence any pair trade would give you much more outperformance than this 55%:20% due to the leverage factor.

And what’s the result of this outperformance? Well, when the DVR was launched, it had a discount of 10%. Over the period, the discount kept widening and in fact reached 55-60%. Now with this outperformance of DVR, the discount is down to 32%. Can this trim further and what is the reason that DVR has caught market’s fancy?

The trigger perhaps was a bit global in nature. Google’s DVR trades at par with the stock and others like Viacom trade at maximum 5-10% discount. But more importantly, when Google announced a share split and that resulted in Google DVR, the S&P had to do something unprecedented. It had to include both Google (GOOG) and Google DVR (GOOGL) on the benchmark index to fully capture Google’s market cap. So S&P 500 now has 501 stocks but is still called S&P 500.

Now can the same logic be applied in India? Picture this – Tata Motors has free float market cap of Rs 85,000 cr and the DVR has free float market cap of Rs 15,000 cr. Now Rs 15,000 cr is not big enough to make it to the index but what if it reaches over Rs 20,000 cr? That’s a question worth asking. I would still say the chances of Tata Motors DVR being part of index is very low but then you never know in this market.

But let me add a word of caution here: While logic says the discount should narrow further, you must not lose sight of the fact that its vulnerable to any market correction because of its outperformance. But all things being equal, it won’t surprise me if the discount trims further to around 15-20%

COAL INDIA: I HOPE SOMEONE IS WATCHING

Coal India futures are outperforming the stock by 4% and today is not even ex-date. So what really happened here?

The essence of the situation lies in the special situation rule that exchanges have in treating futures and options contract. Normally the stock is adjusted for dividend in cash market but the same adjustment is not carried out in futures and hence, in earnings season, some of the index stocks tend to go into discount as they factor in the dividend impact. However, if the dividend is more than 10% of the market price, this falls into special category and even the futures prices are adjusted to reflect that.

What this means in simple terms is that come the ex-date, Coal India future price will also be deducted by 29 Rupees to arrive at previous day’s price. If you shorted Coal India and hence on ex-date you see the price lower by 29 Rupees, don’t cheer it – you are not getting this money.

The case of Coal India was curious. By late afternoon the gap between spot and futures was over 20 points but by the time the trade wound up the discount had narrowed to 12 points. So clearly, there was some big buying in Coal India futures before the markets closed yesterday. Were some of these market participants sure of an over 10% dividend? And if you had bought the future yesterday, you would be sitting on a gain of nearly 40-50% on your margin money given the big move in future.

What makes it even more interesting is the dividend component. A dividend of Rs 29 is 10.03% of the market price of Coal India. Even 10 paise lower and the dividend would have been less than 10% and miraculously, the discount would have widened again today to nearly 28 Rupees instead of converging with future price.

So really, should a 10% move on future price be dependent on a differential of 10-50 paise in dividend? And what would have been the reaction if this was a private company? These are some important questions. May be time has come for the exchange to do away with this special situation rule being applied only if the dividend exceeds a certain percentage. Let them do it for all dividends. It will take away some fun on stock futures trading but it will make the process a lot more transparent. 

SINTEX –WHO IS REALLY BUYING?

Sintex stock is up 72% this month and what is truly amazing is that the stock has started to rally right after 30^th September, which is end of the quarter. So what exactly happened in Q2 and what has happened since?

I am just looking at the recent shareholding pattern changes. In quarter ending September 30^th, FIIs hold 3.7 crore shares or 11.82% of equity, which is remarkably lower than 7.8 crore shares or 24.8% of equity they held at the end of June quarter. And what really amazes me is that this was not bought by either mutual funds or other domestic financial institutions whose total shareholding is almost flat between quarters. And the promoter shareholding didn’t change as well – so who really bought?

The non-promoter, non-institution shareholding is up sharply to over 40% vs little over 27%. In fact individuals now own 8.3 crore shares vs 5.5 crore shares. But what is really perplexing is the category called “Bodies corporate” – Their shareholding is up to 4 crore shares vs 2.8 crore shares. That’s a jump from 8.9% to 12.9%.

Who are these corporate bodies and individuals? None of them holds over 1% stake and hence it’s not shown in the breakup of shareholding pattern, but if the grapevine is to be believed, we have seen a lot of smart/informed buying by certain blue blooded investors (Also, this at times has been disguised promoter buying but we cannot infer that in every case)

By the way, promoters also bought 25 lakh shares between October 17 and 18 and they made a proper disclosure to that effect. From those levels, the stock is up 50%!!!

Now Q2 numbers looked good for Sintex, but the balance sheet is still in a mess. In fact from the same shareholding pattern, you see Bank Of Newyork holding 10.2 cr shares as a trustee for $140 m FCCB due in 2017. Now 10.2 crore shares are worth 350 crores and $140 m FCCB amount to Rs 870 crores. So there is still a lot of risk that this company is carrying.

What to do now with the stock? Well, if you managed to get in early, there is no harm in booking say 35-40% of your holding which might cover your entire costs and make some money as well and ride the rest with a strict trailing stop loss. But if you have missed the bus, wait for the next bus – don’t try to catch this one.

Note: This article was first published on moneycontrol.com

ASIAN PAINTS - HOW EVERYONE GOT IT WRONG

ASIAN PAINTS - HOW EVERYONE GOT IT WRONG

I love how people can be in denial despite their call going horribly wrong. One of the leading brokerages downgraded Asian Paints on October 14, cutting the target from Rs 505 to Rs 405, and since the brokerage is a real blue blooded one, the stock fell from Rs 485 to Rs 470 – the analyst must have felt a million dollars, but wait, within 3 days, the stock is back to 485 and on 5^th day, the stock hits a lifetime high of 530 Rupees after spectacular number.

The brokerage also had a research tactical idea of the stock underperforming which was closed today. All they say in closing the note is this – “This Research Tactical Idea is closed because the stock price has moved contrary to our expectations. Effective immediately, the Tactical Idea published on Asian Paints (ASPN.NS) on October 14, 2013 has been discontinued and should no longer be relied upon”

Now my problem is not that an analyst call has gone wrong. My problem is the resistance the analyst community has to eat their words and admitting that they got it wrong. I have seen 5 brokerage reports this morning and none of them has a buy on the stock, It’s a consensus Sell/Underperform/Underweight.

To all these analysts – I have just a one line response– the stock is up 8% this week, 13% this month and 20% this year. Oh, and the stock is up over 100% since the start of 2012.

Now of course, the key is what to do with this stock going forward. At 30-35x on eyear forward earnings, this is one of the most expensive stocks. But then, when has that stopped a stock from moving higher? If that was the case, Jubilant Foodworks would have never had the rally it had – HUL would have topped out at 450 or 500. Why are investors willing to pay this kind of premium?

The answer lies in the factor that we sometimes ignore; the growth factor. The company has seen double digit volume growth in a seasonally weak quarter. Over the last many years, the company has grown its topline and bottomline in double digits and the stock has been one of the most consistent performers over a 20 year period. In fact if you were to just take FY16 into account, the stock would be available at around 25x earnings, still expensive but then at least you have visibility and certainty of earnings.

Bottomline, the stock may well correct 10% if the market gets into further risk on mood and we see a shift from defensives to high beta. But as of now there is no evidence to believe that the stock will change its texture of being a consistent long term outperformer

WHAT IS THE STREET PRICING IN FOR ONGC?

The ONGC stock has been in focus all through this year. In fact this is the only PSU oil stock worth any significant weight on the index. It’s a pity that this stock has been suffering from whims and fancies of Government in an election year.

Let’s just take a look at what is going on. India’s FY13 oil subsidy burden was Rs 1.6 lakh crores. The Government paid Rs 1 lakh crores out of that and made upstream companies pay the balance Rs 60,000 cr. This roughly works out to 62% for Govt and 38% for upstream, which has been stable for 2-3 years. Out of this, of course ONGC paid the lion’s share of over 80%.

FY14 started on a great note. Global crude price started to soften and the government introduced a monthly price hike of 50 paise per litre on diesel. The combined effect was a projection of only Rs 80,000 crore as under-recovery for FY14 – a straight cut of 50%. However, just when things looked sanguine, came the unknown devil of sharp Rupee depreciation.

A sharp depreciation from Rs 55/$ to around Rs 65/$, along with 10-15% surge in crude prices from lows meant that the under-recovery projection is now back to Rs 1.6 lakh crores. If the Govt bites the bullet and hikes diesel prices by Rs 5/l in one go, this can come down to Rs 1.25 lakh croes, however that diesel price hike is now looking a distant reality.

So where does ONGC stand amidst all this drama? As I wrote, when the year started with an under-recovery projection of Rs 80,000 crores, the street applied the formula of 38% and assumed that the upstream contribution will be down to Rs 30,000 crores. However, it missed the risk that the Government will want to take the benefit of its move on diesel and fall in crude prices. Slowly but surely, street began to realize that there is a risk of upstream still ending up paying Rs 60,000 cr as the ‘worst case scenario’.

However, now even this Rs 60,000 cr burden actually looks ‘best case scenario’ for upstream instead of being ‘worst case scenario’. There is a good chance that the Government makes upstream pay more than they did last year citing the fact that upstream gains significantly due to Rupee depreciation and at some stage needs to pass on some benefit to the Government.

The ONGC stock was comfortable above 300 when FY14 started, even hitting a high of 355 – but since then it’s been a downward journey and we have seen a correction of 22% from the highs. To be fair the stock is still YTD positive and that’s because the street believes that while there may be near-term concerns, the sheer value in stock may start to reflect once elections are out of way.

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 employers as part of his compensation. All views expressed in this blog are my personal views and my channel does not subscribe to the same

BULLS BEWARE, BEARS HAVE THE KNIVES OUT

Thursday should reaffirm the extent of the bear market India is going through. I know a lot of people would think I looked at some other screen since the Sensex was up 400 points and the Nifty rallied 100 points. But to me the internals matter – and the internal that stood out yesterday was FIIs selling Rs 1278 cr in cash markets. This is more selling than they have done on really bad days.

I raised this point yesterday during my show on CNBC-TV18, before this data was out – if you are a bull you don’t want to see FII net sell figure on a day like yesterday, and that’s precisely what happened. So essentially, in a shallow market, the FIIs are now selling on any good day, and yesterday was as good a day as any with so many large caps rising 4-5% or more in certain cases.

Refer to my last post where I spoke of the market mayhem and raised the possibility of FIIs selling in the last remaining safe bastions. That’s starting to happen – so far FIIs have been protected with their investments in IT, Pharma and to a certain degree some FMCG names, but the currency is fast eating whatever limited gains they have made. And this is in a relative world, where the US markets are trading pretty close to all time highs and investors have options to park their money somewhere else.

Now, next week assumes extreme significance. The bears are in firm control and they have so much ammunition at their hand that any rallies like yesterday would give them fodder to feed on, in this case bull’s meat to feed on. Also, look at the options data in non conventional way – the way deep out of money August Puts have added Open Interest, yesterday clearly looks like another bear trap.

I know the market is deeply oversold and almost everyone is bearish and normally that’s the signal of the bottom. But the last stage of bottom formation is always the most painful and results in most wealth erosion for bulls. That may just be around the corner.

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 employers as part of his compensation. All views expressed in this blog are my personal views and my channel does not subscribe to the same.