Thursday, March 5, 2009

Shaping up of Domestic News Flow

RIL-RPL Merger:

The merger of Reliance Industries and Reliance Petroleum is no more a new concept to the shareholders of Reliance Empire. RIL had earlier merged RPL with itself in the year 2002. But, over here we’re not speaking about the recently built refinery which is going to get merged with RIL. RIL had earlier conceived RPL in 1993 in Jamnagar and later announced a merger with itself in the year 2002. At that time, the RIL-RPL merger was carried out at the share swap ratio of 1:11, creeping-in a feeling of discontent amongst RPL shareholders on the reasoning of unfavorable ratio of merger.

Later in the year 2006, RIL again came up with plans of setting up yet another refinery in Jamnagar with the view to build a refinery with EOU status. This new refinery is expected to operate with capacity of refining 580,000 barrels per day. RIL had also offered 5% stake in its refining subsidiary to US energy major Chevron corp. Now Chevron has agreed to sell-off its stake in RPL.

My Views on RIL-RPL Merger:

The merger of RPL and RIL would create a global-scale refinery for RIL. The merged entity would be seen as the world’s largest refining capacity at a single location. It would also yield various benefits of synergies, savings in expenses and costs, and it might catapult RIL into an even bigger Indian giant than ever before, in the eyes of the world. The merger would also lead to reduction in the company's earning volatility & risks, with diversified operational presence. It would, in fact, reduce the risk the shareholders of RPL were exposed to as being a stand-alone refinery. Though, RPL refineriy is touted as being one of the most sophisticated & integrated refinery in the world, it would have taken time to stabilize in terms of profits & higher GRMs in the current landscape of competitive environment & global recession.

ADVANTAGE: Reliance Petroleum Shareholders

Earlier, during the merger between RIL and RPL in the year 2002, the merger clause of share swap ratio was considered unfavourable by the RPL shareholders then. This time around the expectations were somewhat same from the RPL shareholders, on the grounds that RIL has more minority shareholders than RPL. At the time of announcement of the merger, the price ratio going by the then prevelant stock prices of RIL and RPL was around 1:17. Finally, the boards of the two companies announced the merger’s swap ratio at 1:16. This has turned out slightly positive for RPL shareholders, who had speculated the ratio of anywhere around 1:20 on the rationale that RIL has a running and a more established refinery.

Another aspect from which RPL shareholders would tend to benefit is they will get to swap their holding in RPL which is a stand-alone refinery for a much diversified RIL which has presence in various businesses apart from just refining.

Rajiv Memani of E&Y who advised RIL on the valuating merger said, "The valuation is fair and reasonable, we have assigned due weightage to relevant factors such as the market price of the shares, the earnings performance and the asset base of the company. The valuation considered all factors including the net asset value and the market price."

RBI Cuts Interest Rates:

Amid constantly declining inflation & lower than expected GDP numbers for the period October to December 2008, RBI governor D Subbarao has announced rate cuts in benchmark interest rates. Reserve Bank of India has lowered the repo rates to 5% and reverse repo rates to 3.5% from immediate effect. Both the benchmark rates are effectively lowered by 50 bps.

My Views: These rate cuts were somewhat discounted by the stock markets during the last week or two on the back of lower inflation numbers. This discounted feeling was further seconded by the fact that GDP growth numbers for the period October to December 2008 came below market expectation & witnessed a sharp slowdown.

Though, Corporate India seems to be content with the RBI’s decision signaling banking sector to further bring down their lending rates in the efforts to stimulate growth and economy. By cut in its key benchmark rates, RBI has clearly indicated to the lending institutions to lend more and not let its money remain parked idle with RBI.

Repo rates is the rate at which RBI lends to the banks & reverse repo rates is, conversely, the rate at which RBI borrows from the banks.

Keki Mistry of HDFC, feels the reverse repo rate cut is more relevant than RBI's repo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour." (Source of this Quote: Economic Times)

Auto Sales reports robust sales in February:

Auto sales for the month of February rose unexpectedly for cars and two-wheelers. The recent efforts of lowering of interest rates by a few leading public sector banks had propped up demand for cars and two-wheelers among consumers who were postponing their buying decisions on the back of domestic slowdown and liquidity crunch. Though, Auto Analysts also attribute the rise in demand for automobiles to both declining interest rates and reduction in excise duty during the month of December 2008.

Leading two-wheeler manufacturer Hero Honda recorded a whooping 24% growth in sales followed by 13% for TVS Motors. Though, Bajaj Auto posted a 17% decline in sales for the February 2009. Even Tata Motors reported a 19% drop in sales.

My Views: However, this trend in reversal in fortunes of Auto majors may not be sustainable for long. March and April sales may not be up to the mark for the Automobile sector as the lag effect of the slowdown tightens its grip on the economy, and this even before the lag effect of stimulus packages announced by government and RBI come into effect.

Standing in Foreign Trade:

India’s exports for the month of January slipped by 15.9% on the back of severe recession in key developed markets of US and Europe. Lack of liquidity & consequent delay in demand of export led goods and services from India are touted as the key reason behind tumbling of exports in January.

On the other hand, imports witnessed a negative tick falling 18.1% in the month of January. This fall in demand for imports can be attributed to the over-all slowdown in the domestic economy on the back weaker GDP numbers for the quarter October to December 2008.

Director of ICRIER Rajeev Kumar on the above data said, “The magnitude of contraction in trade suggests that the GDP numbers could be as low as 4% in the fourth quarter. There is no reason to believe that the export data will be better in the coming months. The export figures are expected to stabilize around October as the global economy improves.”

GOLD: Technicals, Fundamentals & likely 'Bubble Formation'

Traditionally, Gold has a terrific store of value as ornaments and jewellery for retail customer and coins and bars for traders and investors. Recently Gold has shot up to unprecedented levels on the back of increased risks and uncertainties around the globe. Gold is known as a safe haven and usually offers inflation adjusted returns over longer term.

Is it a 'Golden' Bubble in the making ??

Technical charts of Gold indicate that it has rallied to crucial Resistance of Rs.15,550. Now, Gold movement can witness two possibilities: one being panic fall to Rs.13,000 levels and stabilizing near to those levels. Gold has a very crucial medium term support at Rs.11,200 which would determine its long term prospects. Though, Gold is highly unlikely to test such lower levels any time soon from the current levels of Rs.15000. However, some bullion analysts are predicting that Gold may stabilize near Rs.13000 levels in medium to long term horizon.

Chartists View: From the charts tracking gold prices of last 10 years, it can be clearly revealed as to how the prices of Gold has escalated starting from the year mid-2007. The roots of the current sub-prime crisis were sowed during the latter half of calender year 2007. So, expectedly the prices of Gold has slowly and gradually risen starting from the period July 2007.

Over the period of time, as the recent global incident of sub-prime crisis slowly graduated into a liquidity crunch, the prices of Gold started to take-off sharply in the last 12 months. Eventually, now the charts of Gold quite resemble the charts of Stock markets which formed a bubble in the last stage of its bull phase.

On the other hand, Gold also stands possibility of touching dizzying heights of Rs.17000 levels on the back of deepening global recession and indiscriminate printing of money by reserve banks the world over in a bid to revive their respective economies. There is every likelihood that Gold soar at higher levels & take a 'U' turn after recording new peaks above Rs.16500 levels.

Is Gold rally backed by Fundamentals?

But, history suggets that whenever there is a bubble in any asset class, Analysts and Market participants have always suppoted the rise in the prices as being on the back of certain 'Fundamentals'. Most of the time Analysts have failed to predict a bubble in any form of Asset class. In case of Commodity rally a year ago, they supported the surge in the prices of various Metals with the base reason being 'Depletion of Natural Resources'. For Food Articles they had come out with a logic of 'Declining Land ratio to Agricultural activities & Growing Population'. For Gold, the fundamental view-point that the Analysts are forecasting is 'Increasing Risk in world environment & fall in value of various Currencies in comparison to real-asset value of Gold.'

Will this reasoning of 'Risk-Inverse' value of Gold hold true to enable the bullion to sustain at soaring levels? Only time will tell whether the Gold is, in deed, the commodity to reckon with or whether it will fall in line to its traditional value as being a mere 'Inflationary Hedge'.

ALERT: Gold charts are somewhat indicating that its price is somewhere in the last few stages of bubble blast. The charts are resembling the over-exuberance that out stock markets used to depict a year back. Investors are suggested to be cautious while buying Gold at every higher levels & traders to follow strict Stop Loss while trading in Gold counters.


Read my previous article on 'Strategy for Investment' which is a must read article for all New investors. It explains in detail as to how to approach the markets & strategizing 'Entry & Exit' related to stock specific decisions.

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Ravi said...

Hi Bulls,

Nice to see a person who is writing comments in some other blog has created his own blog.

Good Post!!!

Wish you to reach the same level by making this blog a paid blog one day.

mohit said...

Good article bulls

what do you think is a good price for Entry in RIL & LNT as I know they are your best long term pick..


Ashish said...

Great article. In fact I would say that the content of ur articles is greatly enriched in your blog as compared to your commnets in Dr Krishna's blog. Thanks for holding the fort of educating investors.

Keep up the good work and please dont leave your readers in lurch like Dr krishna did.


Rajmars said...


Nice write up again. Way to Go!!!!. I wanted to know your opinion about the relation between Dollar value and India gold prices as I have read few places that above tech levels of 1000-1050 USD/Oz Gold can go upto 1300 as well as Dollar at a possible 53-54 Rs in another few mnths, dont you think at those levels Gold will touch 20K ?

BULLS said...

REFERENCE: Mohit's Comment


'What do you think is a good price for Entry in RIL & LNT as I know they are your best long term pick.'


There is no doubt that RIL and L&T have proved to be Multi-baggar for its Long term investors. Both the stocks have consistently provided smart CAGR returns since their listing on the bourses.

RIL and L&T had established their all-time peak levels of approximately Rs.3200 & Rs.2300 respectively. Since then, RIL has falleny by whooping 63% and L&T by 74%.


Valuations of RIL seem reasonable looking at the great long term prospects that this stock holds for its shaeholders, not to mention new finds from KG Basin and multi-fold increase in its profits in next 2-3 years from the current finds. But, RIL can still test its Oct 2008 lows of around Rs.950 odd if the weakness in the market persists.

L&T, on the other hand, looks relatively expensive. Though, the stock is battered from its peak levels, technically the stock has closed below its medium term support of Rs.690/-. This may drag the stock lower to around Rs.500-550/- in the next few months, if markets continue to falter.


Dear Mohit, if you must have read my previous article on 'Strategy for Investment', it clearly indicates that investors should not try to enter the stock based on any certain 'ILLUSIVE' levels.

Markets are not bound, by either Technicals or Fundamentals, to reach specific price actions as forcasted by any particular Analsyt/Layman, when it is dictated by the 'SENTIMENT' of its market participants.

So, it is always better not to attempt to TIME market entry as is intended by you. Go ahead with 'BUY IN SMALL QTY ON LARGER DIPS'. Even if the stocks come down further, you are sure that you haven't invested your whole life-time money in it. As it falls further you can average more, as per your strategy of buying more on larger dips.

NOTE: The word 'Larger' dips is important as averaging on every 3-5% fall wont be helpful in such bear phases, where prices keeps on grinding continuously.

The use of strategy will keep you away from 'Emotive' decisions & mental agony. It will make your process more structured in nature.


BULLS said...

REFERENCE: Rajmar's Comment


"I wanted to know your opinion about the relation between Dollar value and India gold prices."


Gold is trading a little lower than its peak price levels on the back of its value as 'Safe haven' and constantly weakening Rupee.

The domestic currency recently established a new low of Rs.52 per dollar, which makes IMPORTED Gold much more costlier in Rupee terms when compared with Gold prices of Dollar.


Though, the current rise in Gold prices shall be attributed to both, weakeneing Rupee and rising prices of gold in international prices.

Weakening rupee may render imported Gold prices even more expensive in India, thus reducing its demand a trifle more than the one with international prices. And hence, volatility in the prices of the yellow metal once they test its peaks. Though, gold prices continue to re-test its peak levels again, as the uncertainty creeps-up in the global scenario.

It is important to understand over here that, a large chunk of India's demand in Gold is sourced from Imports.


The analytical charts of Gold over a period of last few years, clearly mirrors the sharp upward movements that we witnessed in Crude & Equity stocks just a little more than a year back.

This money which was parked in riskier asset classes like Equity markets have witnessed a shift to safer Gold. The funds are now lying parked in Gold & giving sense of 'Bubble Formation' in gold.

Usually, it is tough to predict as to when the 'bubble' will burst in any specific asset class. But, signs can spotted on looking at the charts of the bullion ranging from today & few years ago.


The notion riding behind this is, investors becoem increasingly wary about their capital & returns at every higher levels. Profit booking can be witnessed on every higher level. Al ready, the demand for Gold for jewellery and ornaments have come down on the part of the Retail investors. Now, the only demand that exists is from 'Investment led demand' from coins & bars and more recently through Gold ETF's.

Investors who have bought the yellow metal for trading activity can 'Sell' in small qty on every rise. It would be difficult of the Gold at its most peak.

Just like we do small savings for our future at regular intervals. The concept is the same, like booking profits in Gold at every higher rally from here.


Agnit said...

Hello Bulls...
very nice post...
great efforts...
keep it up...

Shabu's said...

Great Work well I would like to sincerely appreciate you for spending precious time to respond individual comments.

mohit said...

Thanks for your reply bulls.

Faisal said...

Hi Bulls,

Great article and views...Hope to see more frequent posts from you in the near future...there is always something to understand and learn from your posts...

Keep it up...

I would also endorse your views on L&T. Certainly one can patiently wait for some more time for this stock to come down to more attractive levels...500 levels would not be a big surprise at all...




great post...





BULLS said...


Mohd's Query posted in previous blog entry, but went out of my sight and hence could not reply to it then.


"What is your opinion about Moserbaer. This stock now started correcting more. What are the prospects?"


The Company posted a net loss of Rs.25.65 crore for the quarter ended Dec 2008, against Rs.20.4 crore of losses in the same quarter for the previous year. The company said the third quarter posed challenges on the solar photovoltaic side of the business.


Moser Baer is a technology company with cutting edge technologies. It is a leading manufacturer of Optical storage media. It has also ventured into Solar Energy, home-entertainment space and next-generation storage formats like Blu-ray discs. More recently the company has also ventured into manufacturing of photovoltaic cells.

The Company has done well enough to venture into most of the 'EMERGING' sectors of the economy, which shall well be the centre focus in upcoming future. But, the company is currently operating in loss & showing slow improvement quarter over quarter. Usually, a new venture operation takes time to break-even & actually post operating profits.

It would be interesting to be seen as to when does the company manage to break-even from its business model & start earning profits? The Company has the stands chances of providing its investors with Multi-baggar returns, once its various businesses start showing stability & actually becomes earning accruing.


Investors should understand that investing in ‘so-called’ Multi-baggar stocks & eventually earning such returns involves some degree of risk. More the risk, more the returns.

Also, determining multi-baggars is not a one-time process. The business needs to be verified & analyzed constantly every year. It cannot be like a 'Buy and Forget' proposition. Updating yourself periodically about the momentum in the company & its business is a must & remaining in tracking of the company prospects.

Lastly, it is highly unlikely that every Analyzed & researched stock turns out to be a multi-baggar. The ultimate potential of the stock earning a multiple return to its investor depends on long-term prospects of the company & future developments about the potential of the company's business operations & products & services.

Multi-baggars come attached with such 'riders' as uncertainty & low visibility among public. The stock price of Moser Baer has plunged dramatically along with the recent crash in stock markets from the peak of Rs.400 to more recently Rs.50/-. This some what depicts the 'Negative' feeling & expectations of the market participants towards Moser Baer.


"Market dynamics and the environment in which the optical media business has been operating have improved significantly with input prices softening. We will continue to reap the benefit of the fall in prices of commodity-based raw materials and fuel in the next couple of quarters. With high definition drive prices falling, our focus on the blue-ray technology is starting to pay off."


mohd said...

Hello Bulls
Thank you for reply and analysis
about Moserbaer.

Mouli said...

Hi Bulls
In my opinion Indian banks are safer to invest as the regulation and rules are tigher and innovative free run banking is not supported much. Except ICICI bank all other banks look solid. however bank stocks are sliding. Is there a good opportunity to SIP here? I am finding Punjab National bank, Axis Bank, OCB very very cheap. is it good to invest? What is your opinion also on IDFC, SREI infrastucture and Reliance Capital?
Would appreciate a reply with an analysis. thanks Venu

stock said...

India ( nearly 25% Of indian economy)has to catch up to
china(46% of china's economy) in manufacturing because that
can sustain job creation in the long term considering our
currency exchange rate and also nearly 60% or more of indian
population lives on low paying agriculture labour who need
better paying manufacturing jobs which consequently leads to
uplifting/ energizing the economy in general thus
benefiting whole society through BETTER LIFESTYLE for
everyone WITHOUT caste/religious DISCRIMINATION or
CORRUPTION but only by MERITOCRACY (merit based system) like
service sector though very important alone will not be
enough to grow a decent economy. Tata's nano project to
jumpstart the auto manufacturing industry is a right step in
this direction since this will create a lot of other nano
dependent small business ( car parts suppliers) to grow
exponentially and encourage new entrpreneurs which india
has no shortage of., thus creating a boom in domestic
economy. Fears of cheaper chinese goods competing with
expensive indian ones in domestic/international markets in
the long term may be shortlived because chinese economy and
productivity is three times bigger than india's and the low
cost of chinese products is the making of artificial
currency fixing/manipulation of chinese currency by the
chinese red army government.Recent devaluation of all world
currencies including indian rupee versus the chinese one is
proof of that and a good sign for all countries competing
with chinese products, since chinese government don't want
to devalue its own to counter resulting economic inflation
and potential mass social unrests and riots against rising
unemployment there. In the long run even china cannot
sustain year after year growth its achieving today as its
economy is bigger the growth gets slower, thus much of the
chinese manufacturing may get shifted to cheaper locations
elsewhere, and time is ripe for india to take that advantage
by investing in adequate infrastructure required for that in
advance, because india has larger/faster room for growth
than china since we have a three times smaller economy.
Since in india each state competes with each other (e. g
nano case) to get business projects there is less burden on
government to spend which is advantage for india since those
resources could be better allocated to social, education,
healthcare and other value driven productive
programs.Infrastructure is the single biggest thing that
india lags behind china by leaps and bounds since china made
a headstart with economic liberalisation 25 years ahead of
india and china has a proactive government which has less
hurdles of democracy to deal with to fast track
infrastructure projects and social spending unlike the
political bickering/whining that happens in indian politics
to get a simple thing done ( plz do not blame democracy,
since there are many democracies functioning better than
india though not with the size of indian population of
course). Thus infrastructure development either by private
sector or public sector or combination of both needs to be
addressed ASAP. We cannot waste a single second, according
to projection by a india born American professor if we start
investing in infrastructure NOW ( time is right since now,
world commodity prices ( steel, copper etc.) is low due to
less demand in this time of global economic recession) ,
then by year 2020 india would achieve the same status as
china of today (so we still be behind china by 10-12 years
then). Besides we still have to address the massive number
problem of poverty in india which china has almost
successfully achieved. So need of the moment- INFRASTRUCTURE
and POVERTY. Hopefully politicians and VOTERS of next
elections are listening. Jai Hind.

BULLS said...

REFERENCE: Query from Mouli (Venu)


Is there a good opportunity to SIP here? I am finding Punjab National bank, Axis Bank, OCB very very cheap. is it good to invest? What is your opinion also on IDFC, SREI infrastucture and Reliance Capital?


In deed, as you said Banking sector has witnessed sharp correction in last 1 month or so. Non-Banking Financial Institutions were also affected by this sharp slide.

Most of the Banking stocks are quoting around their October lows or even below such levels. Even leading large-cap Banking stocks like SBI and HDFC Bank could not shield themselves from this slide.

I feel Banking stocks have corrected quite a bit relative to market in general.

Fundamentally, this is good time to start 'ACCUMULATING' Banking stock on every larger dip. SBI is quoting at lucrative valuations & levels. Though, HDFC Bank is still not very cheap even after correcting sharply since levels of a month ago.

These 2 stocks (SBI & HDFC Bank) are two the best stocks to fall on from the Banking lot. PNB is second largest Public sector bank with good fundamentals.

But, Technically, Banking stocks are looking even weaker after the more recent crash. Most of these stocks have breached their October lows & could well have another 5-7% in the near term and 10-15% in the medium term horizon for a little more of downside journey.

If you're a long-term investor, dont fall on Technicals to time your 'ENTRY' into these stocks. Start nibbling at current levels & more on every larger dip. The valuations of most of the PSB's are already at reasonable levels. Wait a bit before entering in Private banks, until their valuations erode a bit more.


Your second part of the query related to IDFC, SREI & Rcapital.

IDFC is a leading Finance company for Infrastructure companies. Its valuations have taken a big knock below Rs.50 levels. Its a good pick to start 'ACCUMULATION'. Again its Oct lows of Rs.45 could act a sa crucial support, below which it sets back in negatiove territory. RCapital is easily a good 'ACCUMULATE' for long-term at current levels.

NOTE: If you are investing for Long-term based on fundamentals of the company, do understand that recovery in markets is almost ruled out at least for next 1-2 years. So, block your money while investing in equity stocks if you have patience to remain invested for such periods of volatile times.