Video blog: TCS at the cusp of $100 bn market cap

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1 YEAR OF CHANDRA: MIXED BAG

1 YEAR OF CHANDRA: MIXED BAG

There is a temptation to say N Chandra has stabilized the Tata Group after the ugly Cyrus Mistry saga that played out. Let’s analyze that and while the stock market is not the only yardstick to measure the performance, since that’s an important barometer, let’s take a look at what Tata Group has done under 1 year of N Chandra.

Tata Group is a large conglomerate which essentially has 1 giant company in TCS and 3 large companies in Tata Motors, Tata Steel and Titan. Then it has some other decently sized companies like Voltas, Tata Chemicals, Tata Global, Rallis India, Tata Communications and Tata Coffee among others.

Let’s start with what truly is N Chandra’s baby – TCS. The company that accounts for lion’s share of group’s revenues, profitability and market cap. That stock is up 19.7% in last 1 year, which is good enough but then the IT Index itself is up nearly 16% in that period and TCS has been running under a good template for more than a decade.

Now let’s talk about the much fancied Tata Steel. The stock is up 41% in last 1 year and there have been serious attempts to sort the balance sheet of Tata Steel with the merger of European business with ThyssenKrupp. But just to burst the bubble here, that process started before Mr Chandra took over and the rally in Tata Steel stock is essentially a result of a huge steel cycle where many would argue Tata Steel has actually underperformed. For example during same period, JSW Steel is up 65% and the market now values JSW Steel a good 10,000 crores more than Tata Steel.

Then, let’s come to Tata Motors. There is a school of thought that under Chandra, the domestic CV business of Tata Motors has stabilized. Here again, let’s just look at what Ashok Leyland has done compared to Tata Motors. The stock is up 45% while Tata Motors is actually down 19%. Again, it was a case of being at the right place at right time. The domestic CV market is going through an up cycle and in that Tata Motors may have again underperformed. Make no mistake about it, Tata Motors has been a failure for last 1 year, especially the JLR performance. Ask shareholder of Tata Motors if you don’t believe me.

The only 2 stocks which have truly managed to outperform the markets are Tata Global and Titan, both of which have nearly doubled and this is where Chandra deserves a lot of credit though many people would argue that Titan has been a story of Bhaskar Bhat and Tata Global is bearing fruits of good work done by Cyrus Mistry earlier. But to give credit where due, these stocks have done remarkably well.

Let’s give benefit of doubt to Chandra and say that his 1^st year has not been a failure and under him, the group has made positive strides. That cannot be denied and you have to give the man his due. But I would refrain from saying that he has been a phenomenal success. Let’s see the next 2 years. The jury is still out.

P.S. – This is entirely my personal opinion and I do understand that I could be wrong and I reserve the right of being wrong. 

DOMESTIC RETAIL INVESTORS: TIME TO SALUTE YOURSELF

This has to be said. Indian retail investors over last many years has been at the receiving end of many jokes. Always buying at the top, selling at bottom, “Dumb money” and what not. But the last 6 months have been remarkably different. It’s time the domestic equity investors put their head high and say “We are the smart money”

Picture this, FIIs sold stocks worth over Rs 40,000 cr post demonetization and when during the initial part of this process the Nifty fell from 8500 to 7900, a bear market loomed large. However, the domestic investors said nothing doing and they started to buy. Dollar to dollar FII selling was matched by DII buying and I am not even counting the direct retail buying.

And now, yesterday FIIs bought 4,000 crores at the highest level of Indian markets. Now this is not to say, FIIs have been foolish. They have a choice of investing in various markets and there are many markets which far outpaced Indian markets so they focused their energy elsewhere. But while in the past, retail would throw in the towel at huge FII selling, this time they kept buying treating this as a flash discount sale and boy are they reaping rewards now?

Make no mistake, market is set to go through a frenzy now but this is the time to sit back and enjoy while FIIs scramble to buy at all-time highs. At some point, this market will become euphoric and fall under its own weight but trust me that time is long long way off right now.

Picture this, over last 2 years when the Nifty has made a move from 9100 to 7000 and back to 9100, the midcap index has surged 24%. So retail has made huge money in individual midcaps. And a rising tide will lift all boats, so the portfolios are set to surge higher even from here.

What if you missed this rally? No problem – wait for dips and consolidations, they will inevitably come but when they do, have to participate. There is no fun in watching someone else make all the money.

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

HOW TO PLAY TODAY?

Extremely important day of trade coming up. As I write this, the SGX Nifty is down about 35 points. The most important cue as we start trade in first half is the big 5% decline in crude oil but the most important cue of second half will be the impending exit polls which will be announced post 5:30 pm. The market will give great opportunities today. This is how I think today can be played.

In first half, focus all your energy on users of crude oil – Oil marketing companies, Paint companies and perhaps most importantly aviation companies which could well go through a goldilocks scenario – tax advantage, lower oil prices and under-owndership.  And with state elections out of the way, OMCs should swiftly move on petrol and diesel prices and paint cos too have corrected from highs. So this appears to be the low hanging fruit.

Crucially, in second half – trading psychology will work. Will shorts want to keep their positions open ahead of a mini binary event? Anecdotally, exit polls favour BJP and the market will know that. So I won’t be surprised to see a late surge in trade today, which could continue with a gap up tomorrow inviting some weak hands and finally a Sell on news in tomorrow’s second half.

These are my thoughts. You should act on what you think is right!!

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

HDFC BANK: THE BIG NEWS FOR TOMORROW’S TRADE

This is going to be a short blog post. A very important trigger for the biggest stock in the Nifty and the Bank Nifty. HDFC Bank is the highest weighted stock on the Nifty and the Bank Nifty and it’s now out of the ban list for FIIs. Simply put, tomorrow morning, FIIs can buy HDFC Bank in open markets. So how crucial is this?

Well first of all, those FIIs who want to own a piece of HDFC Bank all this while could still do it. However they could only do it from their fellow FIIs in a special window and the premium on that is 12%. Even today, while HDFC Bank closed at 1327 in the normal market - http://www.bseindia.com/stock-share-price/hdfc-bank-ltd/hdfcbank/500180/ , it traded at 1482 in the FII window: http://www.bseindia.com/stock-share-price/hdfc-bank-ltd/hdfcbank6/600180/

. So that’s the premium which some FIIs are willing to pay to get the shares of HDFC Bank.

Now, I am not suggesting that the stock immediately goes up 12% tomorrow but what is interesting is that this window will last for all of 2 days, i.e 17^th and 20^th and by then it will be back in the ban list as there will be enough demand. So it’s literally a case of a flash sale that lasts for a few hours and you see huge demand.

By conservative estimates, I expect the stock to rally at least 5-6% tomorrow. Do the arithmetic on what it could mean for the Nifty and more importantly the Bank Nifty where it has over 30% weight.

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

THE TATA MOTORS DEAL: FIRST OF MANY BY TATA SONS?

You have all read the news – some unidentified buyer is willing to buy 1.73% stake in Tata Motors at up to 10% premium. Sounds wow right? May be that’s the intention. What I explain here is my gut feeling and I could be completely wrong, so take this with a truckload of salt. Let’s understand few things first. My sense is this unknown buyer is Tata Sons and now let’s get to the deal.

This 10% premium sounds huge but is actually not much in terms of meaning because a) This is screen based, so it’s a maximum of 10% and b) the stock is already down 25% from its highs of 600, so it’s not as if this is some outlandish price for Tata Motors. So what exactly am I trying to say here?

While Tata Group is a huge conglomerate, there are only 2-3 really big stocks and TCS and Tata Motors clearly belong to the top. My sense is that this is 1 step towards the final Tata-Mistry truce where the only logical solution I see is Mistry selling the 18.4% stake in Tata Sons. Now it’s in interest of both parties that this 18.4% gets a reasonable value.

So, this exercise in essence is to make sure the sum of the part valuations of Tata Sons are brought to respectable levels. Curiously, note how TCS was surging today while the rest of the IT pack was down and TCS is the company where Tata Sons of course has highest stake.  Keep watching this space, it could be first of a few more deals to come in this space.

P.S. These are my first thoughts and my personal views. I have not contacted Tata Sons for a response and please ignore the typos and grammatical mistakes.

CASTROL: THE BLOCK DEAL AND BEYOND

It’s public knowledge now that the second tranche of promoter stale sale in Castrol was due. In fact last month, many traders were caught short anticipating the block deal that never took place and stock saw massive short covering.

Something interesting happened again here between yesterday and today. Lot of shorts got built yesterday anticipating the conventional wisdom of the block getting executed at a discount. In fact, yesterday there was some 40% jump in Open Interest and the stock fell 4%

Now, the interesting bit here which a lot of people have forgotten is that Castrol India has been a massive underperformer over last 2 years. In fact the way crude has fallen, this stock should have been a multibagger but actually over last 2 years, it fell some 28% for variety of reasons but the promoter stake sale was the main overhang.

So what happened this morning? The block deal book was launched at a price band of Rs 408-422. First thing in morning, the entire issue was underwritten by a single investor. Yes, a single investor was ready to commit Rs 1800 cr in Castrol. This led to a lot of protest by other investors who all wanted a pie of the share. After all, this is a global MNC, blue chip and a stock which has underperformed with potential to rally big and with knowledge that promoters won't sell any more now with stake down to 51%. So finally, merchant bankers had to drop the deal in the block window since the price in morning itself went much beyond the band and the demand was too huge. And hence the deal at a premium and once again shorts getting trapped.

What next? Well, looking at the appetite today and given it’s last 2 years of underperformance, if the stock has hit an inflection point, I won’t be surprised to see this stock running away to 550-600 and that too if you are conservative. Of course, this won’t happen tomorrow and the stock is bound to have periodic correction. But the market is offering you an interesting idea if you are willing to pay a minor premium over the recent price move!!

P.S – These are my first thoughts immediately after the deal and the feedback I have got. Please bear with me for typos, grammatical errors etc.

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

DON'T FRET OVER REXIT OR EVEN BREXIT, MARKETS ARE FINE!!

WHY STOCK MARKETS WILL MOVE ON

I was in 2 minds about the conclusion of my thoughts on markets post Rajan till 30 minutes back. That is when I decided to go for a walk and by the time I was back, I was fairly certain about what I was going to write. It rained cats and dogs and it still is while I write this. So makes my job easier.

First things first – The only reason anyone should even fret about Rajan exit was because of its timing. It couldn’t have come at more uncertain time with market already bracing itself for the Brexit vote and some renewed uncertainty over the progress of monsoon.

If this was 2015 second half or first 2 months of 2016 when the stock market went through a cyclical bear phase, I wouldn’t have ben surprised by a 300 point Nifty fall. However, things are different now. This is a market in which smart money is so hungry for bad news (so that it gets an opportunity to buy cheap) that the first major correction (if any) will be lapped up by both hands.

The best example of what I am saying was the market’s reaction to the changes in P notes regulations, which the market forgot in a matter of 45 minutes. Last year, the market was making lower highs and lows on the day of good news. This year, the market is making higher highs and lows on the day bad news hits it. In stock markets, you don’t argue with the tape. It’s telling you something

So what makes me so bullish and comfortable on the state of markets? Let me go back to the opening para – the rains. The monsoon is THE MOST IMPORTANT trigger this year for us and if we get a normal monsoon, then you will find (with benefit of hindsight) that REXIT was a great buying opportunity.

After-all, RBI as an institution is way bigger than any individual. Yes, Rajan has done a good job in RBI's war on bad assets and crony capitalism but there is no reason to believe that his replacement will do any different. On the other hands, if the new governor leads to even slightly easier monetary policy, the market will get one more catalyst for a rally. 

Now, the next important trigger this week would be BREXIT. If Britain decided to stay within Euro zone, all markets are poised for a big rally and India would be part of that. If however, the dreaded BREXIT does take place, then again I will repeat the same point. If the monsoon is good, you will find that BREXIT was once in a lifetime opportunity to accumulate stocks.

For tomorrow, trade with caution – Buy any significantly big dips in good stocks and be prepared for a mark to market of 10-15% and don’t be afraid to buy more if that happens. I don't see this market moving anywhere lower than 7800 in a worst case scenario. The way I see it, if we have a good monsoon, this market is on course to hit a new all-time high at some point in Oct-Dec quarter.

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

SOME LESSONS IN LIFE FROM RAAMDEO AGRAWAL

SOME LESSONS IN LIFE FROM RAAMDEO AGRAWAL

I have started doing a new series – I go out and talk to some of the most successful investors but not necessarily about stocks and markets. I try to present the man (or woman) behind the face you see on CNBC-TV18. The personal traits, the lessons of life, the likes, the dislikes, the achievements, the regrets and everything else and then what lessons

So yesterday I went out and shot at the swanky and large office of Motilal Oswal financial services and spoke to the face of the company – Raamdeo Agrawal, someone who is one of the proponents of value and growth investing. These are some interesting takeaways that came out from this interview

1)      Work on a solid foundation, rewards will come later: When asked what has been his biggest achievement, Raamdeo says completing his CA, even though it took time. He still rates the basic education as the most important stepping stone for his huge success

2)      No excuses: Raamdeo grew up in a village with no electricity and a very humble background. But that didn’t stop him from dreaming big and constantly working towards achieving that dream

3)      Enjoy your riches too and believe in giving: Raamdeo enjoys his life. He is an avid traveler. There are only 28 countries left in his bucket list and he will visit them over the next 5-10 years. He also believes in sharing wealth and does a lot of charity work which satisfies him a lot

4)      Take care of your employees: The facilities for employees at Motilal Oswal rival that of some of the biggest MNCs. And they keep working on improving that. According to Raamdeo, it’s more important to retain talent than finding good talent and they go all out to make sure their employees are happy

5)      Read, read and read: To be a successful investor or to be successful in general, Raamdeo believes it’s very important to read good books and treasure your collection of good books. Till this date, he has all the newsletters of Warren Buffet printed and hard bound and he keeps referring to them

6)      No regrets: If you take a calculated decision and it goes wrong – so be it. There have been instances where he has sold stocks right at the point of a start of multi bagger cycle. But then, if he had taken an educated call to sell the stock, he won’t regret it but won’t mind buying it higher again if his conviction tells him so.

7)      Price is last: For Raamdeo, price comes last. Most important is quality, then growth and finally price. His belief is that if quality and growth is sustained, price will have no option but to keep going up. The best example of this is Eicher Motors per Raamdeo.

You can catch the show all through weekend and once the Youtube edition is available, I will embed it on the blog. It was great learning and fun

KOTAK-ING DEAL: HINT OF UNPLEASANTNESS

It’s no secret that Kotak Mahindra Bank has walked away with a steal with ING Vysya Bank. The stock behaviour on Thursday and Friday was clearly telling us that the market liked the price at which it managed to get this really great asset. But the deal has left some unanswered questions and I dare say if I am an ING Vysya shareholder, I won’t hesitate to say, this even leaves some stench of not following best corporate governance standards either. I will explain why

First and foremost, it’s well known that ING desperately wanted to cash out of ING Vysya Bank – the parent company’s troubles are well known. So obviously, there is a hint of duress in this sale. But should that matter if the owner wants to sell it? – yes it does and here is the primary reason.

Take a look at the shareholding pattern of ING Vysya Bank: First of all, the promoters hold only 42.73% stake, not even 50%. Secondly, the total promoter shareholding of 42.73% is further subdivided into two entities: ING Mauritius Holdings which holds 33.22% and ING Mauritius Investments which holds 9.51%. Now take a look at what the regulations say regarding the shareholding and voting cap for private banks.

“Bodies Corporate under Category A (2) Foreign consists of two wholly owned subsidiaries of ING Bank N V namely (i) ING Mauritius Investments I (9.51%) and ING Mauritius Holdings (33.22%). The First body Corporate enjoys full voting rights of 9.51% . The voting of second body corporate is governed by section 12(2) of the Banking Regulation Act, 1949 which says that no shareholder holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights (on poll) in excess of ten per cent or such percentage as my be permitted under the prevailing laws as may be amended from time to time of the total voting rights of all the shareholders of the banking company. At present the voting rights of any shareholder of the Bank, irrespective of the number of shares held by him is restricted to 10% . As such voting rights of the second body corporate is restricted to 10% and thus the aggregate voting rights of Foreign bodies corporate stand at 19.51%”

So, there you go - ING may have 42%stake but it has less than 20% voting right. How can it make a decision on it's own?

The second reason is up for debate – normally in bank acquisitions, for a healthy bank – the acquirer values the target at same valuations as itself – case in point being HDFC Bank’s acquisition of Centurion Bank of Punjab at almost 5 times Book Value whereas Kotak is paying only 2 times the trailing book value. In this case, there is a big discount of nearly 30-40% for an asset which is far more complimentary that Centurion was for HDFC Bank. ING Vysya has 553 branches to Kotak’s 661 and has 638 ATMs vs 1156 for Kotak. Even in terms of income and profit parameters, Kotak is no more than 3x ING Vysya Bank.  But the deal has valued Kotak almost 6 times of ING Vysya Bank. But as I said, this is an issue open for debate.

The bottom line – ING has a voting right of 19.51% in ING Vysya Bank. It cannot make a decision for 100% shareholders. This deal should have been put to vote first and I can guarantee you, this deal would have been struck down by shareholders. In fact, I have spoken off the record to some institutions and they are already planning to write to the RBI. The 57.37% shareholders classified as minority shareholders actually control the voting rights and they have every reason to ask for a better deal. This deal will face major hurdles from minority shareholders and for good reasons.

Disclaimer: These are my personal views.

MARKET LOVES KOTAK AND IT SHOWS IN STATS

Quick comment: The merger of Kotak and ING would create the fourth largest private bank behind ICICI Bank, HDFC Bank and Axis Bank. However, the combined market cap of Kotak and ING Vysya Bank now already equates the third largest bank Axis Bank – But on all parameters, Axis Bank is nearly double of the combined entity of Kotak + ING. Is the market justified in this? Well that’s stock market for you…

PARAMETER                KOTAK + ING               AXIS BANK

Market Cap                   Rs 1.11 lakh cr              Rs 1.1 lakh cr

Branches                      1214                             2402

ATMs                            1794                             12,922

Income                          Rs 13,576 cr                  Rs 19,356 cr

PAT                              Rs 3,123 cr                   Rs 6,218 cr

Assets                          2 lakh cr                        3.8 lakh cr        

Advances                      1.2 lakh cr                     2.3 lakh cr

Deposits                       1.1 lakh cr                     2.8 lakh cr

ROE                             12.8%                           18.2%

Profit per employee        Rs 7.8 lakh                    Rs 15.4 lakh

ADANI LOAN: WHY THE FUSS?

There is a group of people on twitter including some journalists and editors trying to suggest that Adani managed a loan from SBI because of his "alleged" proximity to prime minister Modi. One such editor, recently tweeted an article saying “Adani group, already $10 bn in debt, gets $1 bn loan”…Now, one can only laugh at this kind of statement.

First of all, as clarified to the Bombay Stock Exchange by the Adani group – the loan is not final yet. There is a difference between MOU and final agreement. Here is what Adani has told exchanges.

Adani Enterprises Ltd replied stating "The Company has signed Memorandum of Understanding (''MOU") with State Bank of India ("SBI") wherein SBI has agreed in principle to consider extending financial assistance of an amount upto USD 1 bn for development of Carmichael coal mine. This is, however, subject to SBI's due diligence and internal credit approval and also pursuant to the definitive understanding/agreement to be executed between the parties."

Note the phrase in bold– there will be due diligence by SBI. Raise this issue if they approve the loan without appropriate collateral in place or without being satisfied by the viability of the project. Anyway that’s a technical issue, so we move on.What exactly is this project and how did Adani manage to get this? Let’s take a look at a Reuters story just to put things in perspective

"This project has the potential to be the largest coal mine in Australia and one of the largest in the world," Queensland deputy premier Jeff Seeny said in a statement.

The state's report, which set 190 conditions for Adani to meet, including compensating landholders affected by any harm to water supplies, now goes to Australia's environment minister for a final decision.

Now this is a $15 bn project, won by Adani fair and square after meeting 190 conditions set by Australian government and more importantly, this is not in India. Unless you want to brand the entire Australian decision making body also a Modi agent, you would want to believe that there is nothing wrong in winning a contract in Australia. 

Now coming back to the loan for a group which has a long-term debt of $10 bn – yes, it has – but the group also has a market capitalization of $20 bn!! Ever heard of a concept called the debt/equity ratio? It has a networth of nearly $5 bn. For a power, infra, port conglomerate – this is a reasonably healthy ratio.

For me, the biggest question is “Has Adani ever defaulted on any loan”? – The answer is no.

This is an absolute non issue. If you want to raise bad loan issues, go chase Mr Vijay Mallya –whose Kingfisher Airlines kept getting loans from PSU banks under the tenure of previous governments.

Oh and one more thing, yes Adani group has debt of $10 bn – but 60% of that, or nearly $6 bn is not even raised in India – it’s overseas debt. Go find out all those Adani agents in these countries.

Disclaimer – These are my personal views.

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.

MAKING SENSE OF MARKET MAYHEM

So finally the market is capitulating. But what really is happening out there? Who is selling and what should the market be weary of?

The internal that would worry me the most is that FIIs have actually invested $12.7 bn in cash markets this year. And the Nifty is down 8% despite that. In fact the Dollar Nifty is down 16% year to date. Where exactly has this money gone and what happens if even 10% of this money has to go out?

Well let’s look at the Nifty internals. You would be amazed that only 8 Nifty stocks are in the green this year, but those who are have actually been money spinners. For example, at number 8 is ITC with 9% gains, HUL is up 12%, Dr Reddy’s 17%, Lupin 28%, Infosys 30%, Sun Pharma and TCS are up 40% and the biggest of them, HCL Tech is up over 50%

On the other end of spectrum, the 42 Nifty stocks that have fallen – 33 of them have fallen more than 10% - within that 15 have actually fallen over 30%, 7 over 40%, 2 over 50% and a poor soul by the name of JP Associates nearly 70%. And I am not going into the Nifty Junior and midcaps because you know what’s coming there.

So with some of the erstwhile FII favourites likes SBI, BoB, L&T, ICICI Bank decimated, the key concern should now be what happens to the likes of IT stocks and the pharma stocks. And if that has to happen, will it finally lead to an FII exodus. Keep in mind, even if this market was flat, an FII would have seen 8% erosion purely because of currency.

The other angle that’s scaring me is the absolute low levels of cash market volumes and hence the depth of the market. 96% turnover is being generated in the derivative market with lion’s shares coming out of Index options, which has become a gambler’s den. Even if someone has to sell $10 m of stocks, that would lead to big price damage. Factor this, on Friday, FIIs sold less than $100 m in cash markets, DIIs more than bought that and still the Sensex ended with near 800 point collapse.

And while the consensus is that this market is only headed down, that has been the consensus for some time now. And when a consensus trade is so right, sometimes the bravado of approaching the market with contra views an be painful, unless of course you have deep pockets and a really long term view. Somehow the internals of the market and most importantly the ticker is telling us that there is more to come.

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.