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

WHY DO REFORMS EQUATE WHAT CAPITAL MARKETS WANT?

The market is getting excited; the PM in FM’s role may be on reform path. Really, but what is reform? A steep power tariff hike, or may be a steep diesel price hike?, or may be FDI in aviation, retail, what else? May be double the prices of water being supplied at our home?

Why do we confuse reforms with what capital markets want? Why should you be happy that someone who is already fighting a 10% inflation, has to pay 24% extra for power tariff and that too without the guarantee that the power supply will be uninterrupted or the fact that he may be paying for double of his actual use because of power theft?

Why are the brokerages sulking over petrol prices being cut? Despite the fact that price cut is in no way in sync with the collapse in global crude prices (even in Rupee terms let me say before the usual defence of OMC is spoken up). And worse still why is everyone calling for a steep diesel price hike even after this collapse in crude?

The simple answer is these are relatively easy to predict, easy to call and have direct impact on stock prices. A head of research at a brokerage earns over one crore as salary. He doesn’t mind paying 100 bucks a litre for petrol – but he will be happy if BPCL or HPCL rally by 100 bucks – that would make him much happier.

But should it all be about stock markets? Or let me actually rephrase that – should stock markets only be happy if prices go up? Can we look at a situation where Indian companies make big profits at current prices or may be even lower prices? And that too with a much lower state subsidy burden?

Why is no one questioning the efficiency of the system? Can we improve the absolutely inefficient way some of these companies, especially PSUs are being run? Can we look at a situation where coupled with this improved efficiency, and a sheer economy of scale, some of these companies make much more profits at current prices than asking for a price hike all the time? 

Make no mistake – we are a poor country. The divide between rich and poor is only getting wider and at some point, this greed has to stop. We are making some necessities of life completely out of reach of a vast majority of our population.

Cement cartelisation or bull cartel?

Now, this is amazing. For last 10 days, one report has consistently appeared in either business channels or pink papers - CCI to come out with massive penalties for alleged cartelisation. For the uninitiated, CCI stands for Competition Commission of India - an institution I have zero respect for, because if it was doing its job properly, the first ones to be penalized would have been the oil marketing companies, which are blatantly indulging in cartelisation. Anyways, that's a separate angst and I would deal with that later.

I am not even discussing the merit of a cement cartelisation or a probe here. I am just presenting some plain facts. Now this sword has been hanging for around a month and normally you would expect such stocks to collapse, given the nature of penalties being talked about (50% of last year's profit in some case). But look at what has happened over the last one month.

Ambuja Cement is up 22%, ACC is up 11%, India Cements is up 10% and JP Associates in up 15%. At a time, when the market has been rangebound, or may be has gained 3-4% and coming at the time of monsoon, when normally investors avoid such stocks.

There is another statistic. In 10 days, we have seen Ambuja adding over 50% positions in futures' Open Interest and ACC has added around 25%. Again for the uninitiated, its the directional position you take if you are either bullish or bearish on the stock. Logic says if a stock is up 20% with 50% Open Interest jump, these positions are long in nature.

And now the most interesting and compelling stat. I have just observed the intra-day pattern of cement stocks and since Ambuja is the most liquid one, just look at the following pattern

12th June: Opens at 149.50; closes at 158.50; intra-day move of 6%
13th June: Opens at 158.6; closes at 153.55; intra-day move of 3%
15th June: Opens at 163.5; closes at 169; intra-day move of 3.5%
19th June: Opens at 164.3; closes at 173.35; intra-day move of 6%
20th June: Opens at 166; closes at 176; intra-day move of 6%

And the genral pattern is that stock opens 3% lower and ends 3% higher with some report of "CCI order today" appearing somewhere. And keep in mind, these are derivative stocks, where nowadays you can play stocks in intra-day trade with as low as 8-10% initial margins. So potential return is as high as 60% with a 6% intra-day move.

Some of these reporters are honest and young and will learn with time on how not to allow themselves being used by some market operators. But the sheer price move over a month and intra-day moves suggests we need to worry more about bull/bear cartel rathen than cement cartelisation.

Disclaimer: This is my personal opinion. I am writing on the basis of what I have seen on screen.