Tring!... Tring!... Tring!...

Time is Ripe to Exercise Caution

Tring!... Tring!... Tring!... No, its not a School Bell. Well, not even a Telephone Ring. Than What? May be, an Alarm Bell.

Actually, I just want to convey that stock markets don't ring such 'bells' before they start correcting. They do not provide warning bells stating that, "This is enough mate. Now, pack your bags & stay away from markets." We ourselves have to catch the market signals the cues of which can be in various diferent forms, not necessarily explicit in nature.

Yes! Be cautious... Read this post till last to understand what I mean to say. We may already be in the last stage of the ongoing 'Mini' bull phase which has followed directly from the lower tip of bear market phase. The momentum is strong. Stock are flying high resembling the exuberance of the tip of any bull phase. The momentum may last a bit longer. But, who knows till when? Can you time the exit at the right moment? Not really!... you have to exercise caution & strategise your part-exit plan.

Current Market Scenario:

1) Large-caps are quoting at Expensive Valuations.
2) Mid-caps already catching up & Some even Fully Valued.
3) Small-caps have been moving up from Circuit to Circuit.

Exuberance Levels: High, with Sensex gaining 80% in 3 months.
Nearest Event: Budget & Corporate Results after 1 month.

Part 1: Denial Mode

First the markets recovers from the depression with an all round pessimistic mood and sentiment. Usually, Insurance companies, especially the Bid Daddy L.I.C., keeps munching equity stocks at such times. It plays an important role to support markets at lower levels with the mandate from the Centre. At such time, investors are in denial mode to buy, they think markets will further move down. Then the markets further recover all of a sudden leaving most investors in the lurch. There is a feeling of being left out due to such unexpected rise. They still don't buy aggressively as mood is largely negative.

During this stage, all the counters from different market capitalization are largely under-valued & in over-sold territory.


Part 2: Feeling of being Left Out:

Just as the rally grows into larger proportion investors jump in expecting another big up move. No, the markets still don't go down from there. It rises further to give the feeling of optimism to the cash waiting on side lines. Investors pump-in yet another bout of funds to capture the bullish trend. Regarding Mutual funds, they are the wiser people who entered during the first or second round of euphoria. Foreign funds usually enter aggressively when markets show some signs of positive recovery.

By this stage, Large-cap counters are not under-valued. Though, mid-caps & small-cap are relatively under-valued and in the grip of pessimism.


Part 3: The Real Exuberance

During this stage, the real exuberance is witnessed in terms of buying. Straight gains are made day after day. Positive cash inflow is continuously witnessed with every passing week. Large-cap counters become fully valued during this stage. Still, there is further room for up side in them on the back of momentum.

Mid-caps are the flavour of the season during this stage of market ruled by sheer momentum and exuberance. Small-caps gradually find their feet and they rise the fastest with a series of up circuits on the bourses. Large-cap counters usually rise at a slower pace but their up ward momentum is not completely lost.


Part 4: The Final Countdown:

The last phase of the exuberance is characterized by Analyst visions going forward into future for the company's prospects and earning potential. Large-cap counters start being valued on not current year valuations, but 1 or 2 years down the line. This is the first and perhaps the last sign to exercise complete caution.

During this stage, Mid-caps catch up with their lag to large-cap counters. This stage witnesses participation of the retail traders more actively with the perspective of making some quick gains from the market momentum. Small-caps, usually, are in up circuits with unavailability of sellers on the bourses.

The extra exuberance in the last stage is often forged and supported with new 'logic' that are put forward by the Analyst community such as 'Decoupling Theory', 'Upgraded Fundamentals', 'Strong Potential for the Economy' and so on. The momentum of the last few weeks is attempted to be stretched as much as possible.

Prolific Gains, witnessed in individual stocks, to the extent of whooping 10-15% are notched on an almost daily basis. The proportion of returns which usually take 1 year in Debt instruments like FD, PPF, etc. are usually acquired in time as short as few countable sessions from equity markets. Till when can such times last?


Exercise Discipline & Control:

During this stage, caution should be exercised with utmost discipline, patience and perseverance. Investors would find the situation extremely terrible of being missed-out by huge extent. They have to control the urge of entering the markets at such moments. Traders should apply Strict Stop losses to their each and every trade. If they don't do so, markets will retract in a big way some time or other & at such times traders will be left with their trading favourites which shall eventually turn into papers when their value goes down. When the value starts falling, traders won't feel like exiting their positions at nominal gains or even losses.

The above does not mean to convey that a huge correction is on the anvil. Nor does it mean to say that the markets won't go up any more. It simply is a cautionary posting to put the readers of this blog on a 'Warning' note that valuations are no more cheap as may be 3 months ago. On that note, even a small correction of 10-20% should not be ruled in coming times. The momentum can take markets up- to surprising & unexpected levels, but the crux of the matter is that you won't be able to time out during such exuberant times with ease. Greed takes over from the fear factor during such times of euphoria, from which you have to save yourself swiftly.

Same Old Evergreen Strategy:

The last stage is the hogged by the moment of uncertainty. There is lack of clarity as to what the next big leg of trend would be. Whether markets will stay afloat or give up substantial gains? During such scenarios, my first posting of this blog related to 'Strategy for Investment' would come healthy.

This time, you have to follow 'Sell in small qty on Every Rise' and not 'Buy in Small qty on every Dip'. Minimize your risk with every rally. Accumulate cash with every bout of sell-off you exercise on incremental rallies. The main benefit of using this strategy is, you cut your risk to the extent you sell. But if markets rise, you still tend to benefit from the rally as your major portfolio still remains invested and that you have sold only a fraction of your stocks and portfolio. The money and opportunity that you lose from any potential rally is far less than the benefit that accrues to you for your remaining 'invested' portfolio.

Dated: May 28, 2009
POSITIONAL TRADING CALL:

Reliance Capital (CMP 945)
Buy in 2 Small Tranches:
1st Buy around CMP 930-950/-
2nd Buy around Rs.860-880/-
Stop Loss: 845/- (Closing Basis)
Target Expectation: 1060-1125

High Risk Trading Call:

Ind Bull Real-estate (CMP 215)
Buy Around 215-220/-
Stop Loss: Rs.190/- (Closing Basis)
Target 1: 248/- Target 2: 280/-

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Has the Market Trend Changed?

Two queries are posted in the 'Comments' section regarding the Trend of Indian equity markets and its prospects from here, now that there is a major positive in terms of political stability and likely reform movements expected to be announced in the upcoming Union Budget. In this posting, i will try to address both these queries which has a common base and content as my reply.

First query was from Mohit which he had posted on May 16, 2009, the day when poll results were announced. I had purposely kept his query pending as the trend was unclear for next few days. And that it would have been more prudent for me to let the high volatility, which would follow after such a sharp unilateral move, to subside and find its feat in next one week time. So, now I will take up his query in detail in this posting. His query is as follows:

Dear Viral,
What do you think would be new developments after good election results do you think long term investors should invest now or wait for some time. Please write on new entry prices for blue chips and core portfolio stocks.

Do you think we have missed the bus and the new highs would me made in markets and we would not see previous lows or even 10k levels in coming times

There is somewhat a similar type of query but a little more detailed in nature from Santy in the 'Comments' section of my previous post. The query revolves around scepticism about current index valuations and as to what could be the right time for investors to jump into markets from next few years of time horizon. His detailed query is as follows:

Hi Viral,
Unlike most people predicted, that the market will lose 10-15% post the election , it has surprised everyone and is now trading in 14k zone. Look like unless something major like Satyam happens we don't see the market going down much from here.I have couple of questions in this regard?

1) Do u think it is right time for investors to jump in and start accumulating keeping in mind a 3-4 year horizon?
2) Don't you feel the valuations are too high now?
3) If we do have to start accumulating , then till when? Till Sensex reaches 17-18k mark and then put a hold ?One just gets the feeling that we have missed the bottom and no way market is going to go back to the 8-10 k range. So why wait ?Please let me know your thoughts.


Global Economics:

You just have to visit a few steps back to the last quarter of Calendar year 2008 when pessimism was at it peak and the road to recovery seemed as far as at least 2-3 years of time frame. The bear phase triggered by a deep recession in the Western countries and a sharp slowdown in the next Growth engine of the world - the emerging markets, seemed vicious and entangling the world into more and more signs of trouble.

However, gradually, as the pessimism witnessed its catastrophic low during the October 2008, global markets were back on its way for some consolidation at the higher levels. Some specific parts and industries of the Global economy witnessed a mild recovery in the early part of the Calendar year 2009 which triggered a sharp rally in the global financial markets.

Political Stability:

Indian equity markets swung along with positive cues in the initial part of the rally. Gradually, it seemed that Indian markets lagged a bit behind as compared to other emerging markets. However, the day of May 16, 2009, proved to be a game changer for the Indian markets in terms of fundamental shift for the Indian economy.

The Congress-led UPA were elected as a winner by the Indian public. UPA emerged as a virtual majority for the shot at forming new Central Government, this time without the support of the Left party which proved a major hump in the UPA's stint during the previous 5 year term. Indian benchmark Indices BSE Sensex rose2000 points on May 18, 2009. It was the sharpest rally that the any markets of the world had ever witnessed in a single trading session. The Sensex jumped from 12000 levels to as high as 14000 in a single day.

Is there a Fundamental Shift?

Foremost question that comes to the mind of any investors or traders is whether there is any fundamental shift on the ground level to support this kind of euphoria?

The answer could be nothing has changed in one day except the political stability for next five years. Fortunately, that in itself is a biggest positive phenomenon to happen for the Indian economy. A stable government on the centre with a free hand towards pushing Reforms and Disinvestment process would prove to be a major booster to the economy in the years to come.

There is nothing on the ground that the economy can boast of for a change in fundamentals right away. But, markets don't work on present scenario. Markets are way ahead of the ground reality & it speculates right into the future. The current euphoria clearly factors in that the new government will kick-off new reforms movements & likely disinvestment plans in major PSU companies to raise funds and act towards tightening high fiscal deficit in next few years.

The dream of a stable government for next 5 years in itself could be a big positive for markets. Now, that this prospect of stability is coupled with Reform movements, Disinvestment plans & further incremental Stimulus package for the economy, it is but obvious that markets would give a big thumbs-up to all recent developments.

Will FM Disappoint?

The role of Finance Ministry assumes great importance in the eyes of equity markets. Pranab Mukherjee has been delegated the portfolio of Finance Minister. It is said that India, indeed, needed a FM with political background rather than a technocrat for this elite post.

This is from the perspective of new reforms and other initiatives which could be kicked-off more smoothly under a leadership of an able minister. The Union Budget is expected to be out around July end and markets are having a close eye on sectoral reforms & social reforms for the stability of the economy. The FM is also expected to raise money from crucial funding exercises like disinvestment in major PSU companyies. The proportion of disinvestment could be range from as little as 5-10% in profit making PSU's and as best case scenario it could be as high so that government reduces its stakes in these companies to as little a majority 51% stake.

Even a small 5-10% stake sale would garner a big substantial sum for the government which could be used to develop infrastructure projects, filling fiscal deficit, spending for social sectors like education, rural unemployment, rural health programme, etc.

Where are Market Headed Next?

In the medium term horizon, markets will remain range bound. Sensex has graduated to 14000 levels from 12000 levels with a big cause. It would be naive to believe that we would test those 12000 levels again any time soon. Most of the large-cap stocks are no more as cheap when compared to their Earnings performance. This will further bind the market to remain in a tight range if it wants to sustain in the Nifty 4000-4500 range.

That is the reason as to why mid-caps witnessed a sharp rally in last one week. They were laggards to a big extent when compared to valuations in large-cap stocks. Most of the mid-caps have already rallied 70-90% in a week’s time & some have, in fact, rallied more than whooping 100% by margin.

Markets are currently gasping for breath in the form of News & Events to sustain at current higher levels. The next news event is still at least a month away in the form of Union Budget or Corporate Results which ever is earlier. Until then, markets can be expected to hover from Nifty 4000 to 4500 levels.

Medium-term Downside Risk:

Nifty consolidated in the range of 2500-3150 for almost 5 months. Later it witnessed a break-out raising hopes of a new range altogether which could span from 3150-3850 broad range. But, poll results proved to be a complete surprise. Markets had clearly not factored in this case scenario of a clear majority for any specific Political Alliance.

The win of Congress-led UPA alliance came as a surprise to the markets which got reflected in ‘Panic Buying’ by the market participants raising market bar by almost 20% in a single session. The new range has come on the anvil at Nifty 3800-4500 range.

With this, the risk of re-test of previous 52 week lows of Nifty 2500 could be ruled out once and for all. Now, speaking about worst case scenario (whatever it's triggers be), would bring downside risk at Nifty 3150 which is an extremely strong support zone. The all-important resistance at Nifty 3150 for the old 5 month trading range of Nifty 2500-3150; would now prove as a very strong support from here on. The corresponding figures for the benchmark index Sensex would be rougly around 10500 levels.

Is Re-test of Nifty 3150 eminent?

A re-test of Nifty 3150 may not necessarily be eminent. But, a re-test of Nifty 3150 would put Indian indices on a very strong footing as that would amount to big consolidation commencement a start of a new bull wave. But, a re-test of Nifty 3150 won’t be so easy to come by now that we’ve a very stable government at the centre. Possibly only the negative global cues could act as a trigger if we were to re-tests Nifty 3150 over medium-term horizon.

However, there are other crucial supports on the downside from current levels, the re-test of which could be more eminent over a period of time than perhaps Nifty 3150 levels which could be more so a target for the worst case scenario. There are crucial supports at Nifty 4000 and 3500 which will provide a strong guard against any further downside risks.

Are Valuations Too Expensive Now?

Valuations in many large-caps are, of course, expensive. In fact, valuations of some heavyweight large-caps like RIL, ICICI and HDFC to name a few, are way ahead of their current earnings performance. Even particular large-cap FMCG stocks looks a bit over-valued as they have not under-performed during the pessimistic times.

Oil & Gas major Reliance Industries currently trades at a P/E multiple of 21 times at the prevailing stock price of around Rs.2200/- levels. Even financial conglomerate ICICI Bank trades at a steep premium valuation of 22 P/E multiple. Housing loan provide HDFC Ltd. quotes at a steep premium of 27 in terms of P/E multiples.

However, there are still some large-cap stocks which could provide some bit of value even from current levels especially from PSU Banking sector. Though, even they have appreciated quite a bit in last couple of months, they atleast don’t look excessively expensive as compared to their private counterparts.

Is it Right Time to Buy for Long-term?
Have you missed the bus? Don’t fret…

When speaking from investment for 3-4 years perspective, I feel that valuations of most of the large-caps are a bit over-valued at this point in time when compared to their earnings performance. That does not mean that markets will come down very soon. Momentum is strong right now. When Momentum and liquidity takes front seat, valuations have to temporarily take the back seat. Eventually, a jolt will ensure that the fundamentals start dictating the terms again once exuberance is built in excess quantity.

Also markets have rallied to the extent of whooping 75% from Sensex 8000 to 14000 without any time consolidation. This makes the rise too steep, too soon. Markets can not keep on rising unilaterally permanently. It has to take a breather at some time once excess are built to a big extent.

Before we get next big up move in longer-term, I expect markets to consolidate or test lower levels as a step towards showing more solidarity for a larger up move. Take one more case – suppose even if the current momentum-led drags market to higher levels from here, sooner or later the much needed cool-off will be witnessed & the current levels will again come sometime in future. In fact, may be even lower levels. So, long-term investors should not get a feeling of left-out from the rally. They should stick with their present portfolio & ride the ongoing momentum. At least, they could see their losses getting trimmed out.

Note: I would rather recommend like to ask why would investors like to TIME the market entry? There is nothing guaranteed in stock markets. Neither downside, nor upside. Go for a Strategic approach. Buy some small quantity even now & more only on larger dips. I would like to remind investors of the strategy that i had posted in my 1st ever blog post of this site. Please go through it again, it makes decision-making process easy & less dictated by emotional calls. It saves one from timing the volatilty of the market.

Near-term Outlook

Coming to very near term, markets have crossed Sensex 12000 with a cause of a big positive from Political front. This would ensure that we’re not to go back in the old zone so soon. Markets will hover around Sensex 13000 to 15000 zone for some time. Later it has to be seen what kind of resistance is being witnessed at higher levels. It has to be determined as to what kind is liquidity on the side lines makes the beeline for the market entry.

Many left out Mutual funds with huge cash positions have to ensure that they deploy the cash gradually into the markets to shield themselves from the ongoing momentum led bullishness. This will ensure that an able support is determined at every dips and lower levels.

The Big Bull:

A very big resistance and a test for markets will be around Nifty 5250 & Sensex 17000 levels. By above, I do not mean to convey that these levels could be tested. I just need to convey that this is the zone which could differentiate between a dawn of a new bull phase and lingering in the ongoing bear phase. Markets will find strong resistances around Nifty 5250 zone and Sensex 17000 levels. That will be the true test of the current rally.

Summary of the Post:

1) Are Large-caps Expensive?: Yes
2) Are Mid-caps Expensive?: Partly Yes
3) Is it Right time to buy for Long-term?: May be Not
4) So when to Buy for Long-term?: Wait for a substantial Dip.
but at that time don’t fret to buy when there is all-round selling.
5) What are Medium-term Supports?: Nifty 3800-3500-3150
6) How much has Indices appreciated from Lows? : A whooping 75%
7) Short-term Outlook: Range bound in Nifty 3800-4500 zone
8) Are Indian Markets still Coupled with Global cues: Yes
9) What could be the best time to buy for Long-term? Around Sensex 12000
10) Will Markets test Sensex 12000 soon? No, it will test patience.

Trading Call for Short-Term:

Power Finance Corporation (CMP 190)
Buy in 2 Small Tranches:
1st Buy around CMP 190-194
2nd Buy around Rs.175-180/-
Stop Loss: 169/- (Closing Basis)
Time Frame: Around 45-60 days
Target Expectation: Rs.225 when Nifty reaches 4500 levels
which is the upper band of our short-term range.


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Mid-caps vs. Large-caps

A query has been posted in the 'Comments' section by Antriksh Patel on the behaviour of stocks from different Market Caps viz., Mid-caps and Large-caps. The query is relating to why mid-cap tend to give superior returns as compared to large-caps.

Hi Viral,
Nice article once again. I eagerly wait for your articles to come.
One query related to stock market behavior - "Why do the mid-caps tend to give better gains then the large-caps; what is the logic behind this behavior. I have observed that the large - caps have hardly doubled whereas mid caps has multiple 3 to 4 times. I can't understand this."Kindly throw some light on this.

Thanks,
Antriksh Patel

The Bigger First:

There is a belief that Mid-caps usually out-perform Large-caps by a big margin. But there is a rider to this notion. Usually, mid-caps out-perform large-caps during times of extreme exuberance and optimism. The rally in mid-caps can not bloom in a great way until such times of confidence and drama as we're witnessing right now. Whereas, on the other hand, large-caps are foremost to lead the rally when there is change of sentiment from pessimism to optimism. The benefit of first flight to safety is usually reserved for large-caps with sound fundamentals during recessionary times.

A large-part of the market pie, in the initial period of change of sentiment, is savoured by large cap stocks in form of rally in these counters where fundamentals and financial positions are strong and sound. Once this rally graduates into such a mode that the valuations of the large-caps looks expensive, there is a shift in market attitude. They tend to shift their money from large-caps to mid-caps where the valuations might have lagged & there is some degree of safety on terms of stock valuations.

Bridging the Valuation Gap:

The rally from large-caps tapers to mid-caps thus bridging the ‘Valuation Gap’. But, for this to happen, most of the large-caps must be fully valued or to the extent that such big counters deserve to be rated at. Later on, as market participants find it hard to justify more sanguine valuations for these large counters, the large-caps become stable at their higher-end and the markets enter the consolidation zone or may be even a small correction.

Gradually, investors start flirting where the valuations are in 'Comfort Zone' i.e., in battered Mid-caps but with good fundamentals & performance. From then, the 'Circular Flow' among Mid-cap starts where the trend of rally in mid-caps circulates among themselves from one clutch of mid-caps to another thus attempting to make the rally more inclusive & universe in nature.

Small & Sweet:

Generally speaking, Mid-caps are those companies who are relatively in early stages of business as compared to large-caps. Many mid-caps may also be involved in fast growing businesses or even special Niche segments of the market with unique product/service offerings. These companies may also have fast growth potential on the back of smaller business volume and relatively smaller base of their balance sheet size.

All these factors tend to come in final calculation while determining the company’s growth rate and its stock valuation. And, lastly, market stability and exuberance also plays its part in the last say about stock price valuation in mid-cap counters.

Volume Game:

Where as, Large-caps are usually past this phase and are into big volume game and may not exhibit the same rate of appreciation in growth as may be mid-caps with smaller base of balance sheet size. A small company, which operates on a relatively smaller balance sheet size, can grow at the rate of a few numbers of times (example, double or triple). Where as, a large-cap company grows in terms of few Percentage number of growth (example, 30% or 40% growth) on its already high base of balance sheet size.

Law of Gravity:

Whatever goes up, has to come down. During times of pessimism, the Mid-cap stocks are the ones which take severe beating in comparison to large-caps. Those very same reasons which lead to a steep rise in stock prices of mid-caps can come at play to support the reasoning of the slump in their stock prices during pessimistic times. Smaller balance sheet size would facilitate relatively lower leverage to tap sources to raise capital during times of crises. During such times, the financial performance of mid-cap companies can witness sharp fluctuations on account of volatility in incoming orders for their businesses, ability to raise funds, flight of capital from equity investments, etc.

However, if the fundamentals of some selective Mid-caps are really strong and sound from all perspectives like growth potential, financial standing, corporate results and governance, ability to raise funds, operation in Niche segment of business line, high growth potential, etc., they can as well depict stableness & low fluctuation as may be attributed to Large-caps stocks. That's not all, they can as well provide superior returns during up turns as compared to large-caps and still exhibit strength on the downside during slowing times.

In short, investment in mid-caps provides potential to grab high returns with the rider of high risk involved in them if the bet does not fall right & the company faces problem in shift engagement and continuation of its normal business activities, especially during hard times.


Small-cap Call : Investment + Trading

Kalindee Rail Nirman (Engineers) Ltd.

Value Buy Zone: Rs.125-140 (CMP Rs.138)
Short-term Target: T1 Rs.158/-, T2- Rs.180/-
Time Frame: 45-60 days; Rationale: Rail Budget
Medium-term Target: T1 Rs.180/-, T2 Rs.230/-
SL for (Short-term) Traders: Rs.120/-


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Trading Strategy: Buy on Dips, Support will Come!

'Buy on small Dips' Strategy mentioned above is meant only for Traders & not for Investor fraternity. Time for 'Value Picking' is a bit behind us. The current euphoric rise only warrants trading bets & not investment bets at this point in time. However, even investors will get opportunities at a later period. Wait for it.

Remember, markets always keeps giving chances, just that you have to grab it with both the hands. Investors have to hold their breath for some time unless the excess euphoria & valuations are driven-out. Markets will test the patience of investors, as every dip will be bought in from here on. Traders, on the other hand, have to move-on with strict Stop Losses for their tardes irrespective of market levels. There is plenty of opportunities and rationales for the traders to commit themselve to fresh trades even from here.

There is a query from Jamesvaikom in the 'Comments' Section regarding suspicion and a feeling that even Mid-cap stocks are gaining weight in terms of valuations and that even they are showing weakness in the recent market consolidation.

Sir,

I think now even mid caps start showing some weakness. I think it is time to book profit even in mid caps and sit on cash. I think buy on dips after strong rally may be like catching falling knife. what is your view.

Sensex has unilaterally raised from the trough of 8000 levels to a whooping 14000 levels in a small duration of past 2 months time. Most of the large-caps are no more in the 'Comfort Zone' in terms of Valuations. In fact, many mid-caps have gradually shown steep rise to the extent of 15-25% in every passing session. This even as benchmark indices are cooling-off its heals after a big band Range expansion of 20% rise in one session.

Nifty had made an intra-day top at 4500 levels on May 19, 2009. This high was sustained for hardly half hour before profit booking smartly kicked-in. The closing for the day was around 4300 levels. Since than the markets are consolidation what with most of the heavyweight stocks in the index looking far more over-priced in very near-term horizon.

What Next?

What next could be the course of the markets from here? Markets are in a hibernation mode and in an Accumulation zone. Nifty has corrected to 4200 levels as on day's closing.

At current situation, most of the Equity Mutual Funds are holding large chunks of Cash deployable in the equity markets. The post-election rally from Sensex 12000 to 14000 was like a 'Lull' in which no body could participate as it was based on a thin Volume of approximately Rs.3000 crore. Most of FII or MF or Retail Investors missed this gap of 2000 point Sensex rally created on May 18, 2009, on the back of surprising Poll outcome.

Mutual Funds, which are sitting on record Percentage of deployable Cash ranging from 10-25%, will be looking to enter the markets in a slow manner on every dip. All market dips will prove as a boon for these fund houses to infuse money into the markets to reduce their chances of under-performance to indices, in case markets continue to move forward until announcement of upcoming Union Budget.

Along the way, as we have already started witnessing Mid-cap momentum, it is a clear reflection of increased Retail participation in the small counters where usually large institutions remain cautious and away from being too aggressive at.

Mid-Caps Faltering?... Not Really!

Mid-Cap shall show signs of weakness or tiring out during the Sessions when makets fall sharply. Though, they may regain their lost sheen & recover their Momentum as soon as Benchmark Indices settles in a small Consolidation Range within next few Sessions. However, it is recommendable to keep an eye on the 'Valuations' of the stock specific mid-caps before indulging aggressively into each one of them.

Although, there could be a puzzling rider to above discussed strength in Mid-caps. The rally in mid-caps could be a 'Pass-on' game. Some mid-caps may gain momentum, and the positive rub-off may be passed on to other category of mid-caps. Thus, a large universe of mid-caps could catch fire and value to engross and elevate the momentum play.

What with important event like Budget as a next destination, market participants and punters are very much likely to bet on stocks and sectors which are likely to benefit from crucial Budget spending, reforms & initiatives. The Budget related punting has already started. At the same time, markets will also have its eyes open wide and clear as to which crucial portfolio at the centre are being mopped by which prominent leaders.

Sectors that are expected to be in lime light are PSU stocks led by chances of Disinvestment, Banking Stocks led by chances of Reforms, Capital Goods and Infrastructure stocks led by increased spending on Indian infrastructure, Power stocks led by quickening of Power reforms, Education sector stocks led by government's commitment towards Education & most importantly Agricultural stocks led by boost to Irrigation and Agri Projects and spending.

Adjustment of Valuations over Medium-term :

From Medium-term, markets are likely to be over-stretched at this point in time. But, in short-term the momentum is strong and infusions of cash from fund houses at every lower levels are likely to offer downside support to the markets around Sensex 13500-13000 levels at worst.

However, as discussed in above paragraph, over medium-term horizon the valuations certainly look expensive. So, that will be adjusted over next 2 months time depending upon the outcome of Budget and all-important Corporate Results. Gradually, markets as a whole, will adjust its valuations depending upon the final hearing in Corporate Results & actual Performance.

And, that will be the moment of 'Reality Check' for the Indian Stock Markets. Till than, i hope, that the Party Continues... Please note, I may go wrong in predicting all the above said Analysis. But, now that markets have shown a clear cut upside breakout post-poll results, Traders ought to latch on to this 'short-term' bullishness with a trade on the long side. Next, the decisive tide will flow-in, when rest of the factors like Budget outcome and Corporate Results will start dictating the fundamentals, not before a month long time.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Trading Idea & Strategy: PSU major BHEL

Antriksh Patel has asked a query on L&T and its Prospects until its Results announcement. Presuming from his query that his investment perspective is only until Results announcement for the stock which is 35-45 days away from now, he seems to be having sight on the Short-term prospects of L&T until around Mid-July 2009.

Hi Viral,
I think L&T is slowly and gradually gaining momentum.
Till the results it can touch 1700. What is your say?

For this, I have presented an alternative for short-term trading purpose in a PSU stock - BHEL. In the current situation, L&T may be prone to a small downside before it makes fresh highs. The stock has jumped sharply from Rs.950 before election results were announced to Rs.1350 at today's closing. No doubt, the momentum is strong in the counter and it has shown amazing strength even in the last couple of day's of extreme volatility.

But, here is what i have to say for trading in BHEL and what strategy can be adopted to minimize the risk of trading in this counter with appropriate strategy to be used as follows:

Dear Antriksh,

FROM SHORT-TERM PERSPECTIVE...

L&T could be, indeed, one of the top contenders to benefit from renewed infrastructure spending that may likely be announced during the Union Budget some 35-45 days from now.

But, speaking in terms of price appreciation in last few days in L&T and BHEL, perhaps BHEL is a better contender to benefit from dual reason of Infrastructure & Power sector spending and also Disinvestment prospects in PSU stocks by the Central Government.

Also, L&T at today's closing has still not corrected substantially from its peaks since election rally. Whereas BHEL has given up half the gains witnessed post-election rally to till date as on today's Closing level of Rs.2040/-.

However, BHEL and L&T are both expensive seen in terms of Valuations. But, in short term one can play with BHEL by buying as per below mentioned strategy with view of 30-40 days holding period:

Suppose You wish to invest Rs.16000 for Short-term Trading:
Buy BHEL 5 shares @Rs.2040 (CMP)
Buy BHEL 3 shares @Rs.1850-1900 Range

Once you Buy the stock @Rs.2040, you need not worry whether the stock goes down or up in next few sessions. You can still average at lower levels until Rs.1850-1900 since you have staggered your trading amount of Rs.16000 into 2 parts of Rs.10,000 and Rs.6000.

If the stock goes up after buying the initial quantity of 5 shares @Rs.2040, no need to think about remaining quantity. At least, you have invested 60% of your amount & you'll be rewarded to that extent, even in times of high uncertainty in present times.

Trading Idea for BHEL :

Buy in 2 Tranches at Rs.2050 & Rs.1900
Target 1: Rs.2300
Target 2: Rs.2500
Stop Loss: Rs.1800 (Closing basis)
Time Frame: 30-45 days.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Mid-cap Mania: Videocon Target Achieved

Momentum Tapering from Large-caps to Mid-caps:

In my posting dated May 14, 2009, it was clearly mentioned that the current market rally will gradually taper in favour of mid-caps as large-cap stocks are increasingly getting over-valued at upper levels. Comparatively, mid-caps are big under-performer in terms of Valuations and that the 'Valuation Gap' needs to be filled to some extent.

Unless a majority of the mid-cap universe with sound fundamentals does the catching-up game in terms of valuations, we would gradually witness tapering of the current rally amongst large-caps in favour of mid-cap counters where there is still a cushion of 'Valuation Gap'.

At some point of time, even if the current momentum is to survive, the rate of appreciation amongst large-caps would cool-down and slowly pass-on the baton to mid-cap counters. When such a phenomenon of rally tapering from large-caps to mid-caps would take place, the markets are expected to take a breather and settle into range bound movement. (Posted on May 14, 2009)

This will see most of the large-cap stocks cooling their heals around current levels. This will also lead to a small consolidation pattern in Nifty and Sensex as major market movers cool-off. But the momentum will shift to mid-caps for some period of time unless there is consolidation among large-cap counters to some extent.

However, some selective PSU, Infrastructure, Education and Agricultural related stocks will continue to remain in limelight irrespective of the large-cap or mid-sector they fall in. This selective out-performance is expected to on the back of prospects of stable government at centre which would lead to some positive reforms, divestment, boost to infrastructure spending, etc. as may be likely announced in the upcoming Union Budget which is 35-45 days away from now.

Videocon Industries: Target Achieved

Videocon Industries: Buy Videocn in the range of Rs.105-120 with a quick target of Rs.150-160 with in few sessions. Strict Stop loss for this diversified conglomerate should be placed at Rs.90. CMP Rs.122.
(Posted on April 24, 2009)

The stock did not make any substantial move even on markets rising continuously since Sensex 8000 levels. The stock had under-performed big time since market recovery a couple of months ago. Traders were time and again reminded in my subsequent postings to persevere with the trading call with a strict SL of Rs.90/- where the stock rests at a strong support zone.

Finally, the stock has made a move post-election results now that mid-cap mania has just started. The first target of Rs.150/- is achieved on intra-day basis just as I am writing this post over here. Anyways, the idea, over here, is not book full profits in Videocon as the momentum may have just started in the counter. I would like to recommend traders to book profits in Videocon on below mentioned criterions:

Criterion for Traders depending on their Risk profile:

Low Risk Traders: Book 70% Profits @Rs.150/-
Medium Risk Traders: Book 55% Profits @Rs.150/-
High Risk Traders: Book 40% Profits @Rs.150/-

Book profits depending on the category you fall in and ride the upside momentum in the ongoing mid-cap momentum. For all traders the Trailing SL strategy to be used at Rs.125/- instead of our original SL of Rs.90/-. This will ensure that even if the stock reverses its gains, traders could still exit at nominal profits @Rs.125/-.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Traders: Book Gains On Rise

Most of the trading calls reached both their targets as on May 18th and 19th. However, most of the targets were reached on the back of positive surprise on the Political front which was welcomed by the markets with both the hands.

My Blog Post dated April 24, 2009 titled as "Nifty Outlook & Trading Ideas for Next 15 Sessions":

CRUCIAL 200 DMA RESISTANCE:
Now, markets shall take a breather for some time around current levels or within a narrow Nifty range of 200-300 points lower from here as a pull back approach. Then again, markets are likely to re-test Nifty 3450 (for 1 or 2 times) to check its resistance strength. If in final analysis, markets succeed in crossing crucial Nifty 3450 level, we may well be in for a surprise rally towards Nifty 3850-4250. These ultimate targets of Nifty 3850-4250 may well be the highest point of current bear market rally, if we succeed to cross over 3500.

Nifty Traders: Traders can go Long on Nifty in around 3450-3500 range (preferably above 3500 closing) with upside Targets of 3850-4250 & observe a Strict Stop Loss of Nifty 3300 levels. Please note that the Stop Loss to be observed on Closing basis.

Trading Ideas for Upcoming 15 sessions:

1) IDFC: This company from NBFC space has run up smartly from Rs.60 to reach Rs.75-78 range. If IDFC manages to conquer Rs.82 levels as a weekly close, it will graduate swiftly to its next target of Rs.95-109 in a quick period of time on the back of break-out on the upside. CMP Rs.75.
2) BHEL: Heavy Engineering major BHEL can be bought around Rs.1550-1630 with a Target of 1800-1950. Strict Stop Loss of 1500 is a must for trading in this Power Equipment major. CMP Rs.1639.
3) Videocon Industries: Buy Videocn in the range of Rs.105-120 with a quick target of Rs.150-160 with in few sessions. Strict Stop loss for this diversified conglomerate should be placed at Rs.90. CMP Rs.122.
4) Power Finance Corporation: If this Power Finance company sustains above Rs.160 for 2 consecutive days it will witness a break out for Targets of Rs.185-195. Stop loss for this stock can be observed around Rs.140-145. CMP Rs.157.
5) Power Grid Corporation: Power Transmission major PGCIL would witness a break out if it manages to sustain above Rs.105 for next week closing. The stock can later on soar to Rs.120-130 without much patience. Stop Loss Rs.90. CMP Rs.100.
6) L&T: This E&C giant is most likely to cross Rs.1000 & touch Rs.1050-1100 if Nifty manages to sustain above 3500 for next week.The stock will lead the rally along with other heavy weights to prop up the markets from here.

To Read full posting in detail, click below:
Nifty Outlook & Trading Ideas for Next 15 Sessions

Except for Videocon Industries all other stocks have touched its 1st and 2nd Targets on the 15th Session since the posting was made on this blog. Power Grid has just reached near to its 1st target at Rs.118/- as I am publishing this post over here. My suggestion to the Traders who took calls on these calls should book 60-70% gains today itself and cut their risk for their trading bets. However, with the remaining 30-40% held they can ride the ongoing momentum for a bit longer as the trend has turned ultra-positive in very near-term horizon.

In my posting dated May 08, 2009, Trading targets for Suzlon and HCC have also been achieved.

Note: The above posting is only for Traders who took calls based on above recommendations. A separate posting will be sent directed towards Investors and how to approach markets at a later date. Do not confuse this posting with Investment ideas. Right now, even i am reviewing market position and its nature of behaviour.

Remember, in Times of Uncertainty & Indecisiveness…
Strategy for Investment

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Value Picks: Mid-caps for Long-Term

Value Mid-caps for Investment at Current Prices:

1) Videocon Ind. (Rs.90-125)
2) Gitanjali Gems (Rs.45-75)
3) Alok Industries (Rs.12-16)


Concept of Value Buying:

Speaking about just a couple of months back, there were many Mid-caps on the block which could be termed as pure 'Value' Picks from long-term investment perspective. However, since then, benchmark index Sensex has moved up about 45% from around 8000 levels to 12000 in a very short span of time. As expected, a large part of this rally was driven by Index heavy weights; while the performance of a large part of the mid-cap universe was quite a laggard when compared to a stupendous appreciation in valuations of selected large-cap stocks.

In fact, over here, it could as well be said that some selected mid-caps have completely ignored the ongoing market rally and are still very near to their 52 week lows. However, there may be specific reason for each of such counters as to why the market participants have conferred the under-weight rating for which these stocks missed-out on participating in the market rally in a substantial manner.

The reasons could differ from company to company. It could be sharp recession in US for export-oriented companies heavily dependent on Western countries or it could also be intense competition from around the globe for others. On the other side, for domestic demand oriented companies, it could be slowdown in demand for their goods or services on the back of consumer mentality of curtailing expenditures for the time being during the slowdown period. We would discuss more on this under-performance of some mid-caps in the later half of this posting.


Tapering of Momentum from Large-cap to Mid-caps:

Unless a majority of the mid-cap universe with sound fundamentals does the catching-up game in terms of valuations, we would gradually witness tapering of the current rally amongst large-caps in favour of mid-cap counters where there is still a cushion of 'Valuation Gap'.

At some point of time, even if the current momentum is to survive, the rate of appreciation amongst large-caps would cool-down and slowly pass-on the baton to mid-cap counters. When such a phenomenon of rally tapering from large-caps to mid-caps would take place, the markets are expected to take a breather and settle into range bound movement.


Value Picks among Mid-caps:

Over here, it is important to note that most of the mid-cap stocks have almost doubled from their 52 week lows. But, even so, the area where these mid-caps lagged in comparison to their counterparts from the large-cap space is 'Valuations'. Even as most of the leading mid-caps have doubled, their valuations are still not as stretched as some of those index heavy weights. In this posting, I'll discuss about prospects of three such mid-caps where the rate of appreciation or for that matter even valuations are relatively lower as compared to other mid-cap counters.

Videocon, Alok & Gitanjali Gems:

Gitanjali Gems: Firstly, among the three value mid-caps mentioned above, the risk of downside is relatively lower in case of Videocon and Alok Industries as compared to Gitanjali Gems simply due to the fact that the stock has doubled in a span of 2 moths. Gitanjali Gems is a top-most leading player in the branded gems and jewellery market of India. It is one of the leading players in the jewellery retailing business with leading brands like Nakshatra. The company has also expanded into US which is one of the biggest jewellery retail market. The company has also recently expanded into Lifestyle products like international designer brands, watches, leather accessories, cosmetics, etc.

Glittering Value: The stock price of the company has appreciated more than 100% from its 52 week lows on the back recent Buy back announcement by the management. But, still the stock quotes at not so expensive valuations. Even though this stock has appreciated more than double from its lows, I have included the stock as it is way off from its all-time highs of Rs.450 and quoting at a Price to Earning multiple of 4.5 times.

Steady Sailing: As this posting is related to long-term investment in the stock, we will have a look at the trend of past performance of the company to have a rough idea about the stability and growth of the company's historical performance. Going back to F.Y.2004-05, the company's Sales was Rs.1350 crore. It gradually increased to Rs.1620 crore for year F.Y.2005-06, Rs.2220 crore for the year F.Y.2006-07 and Rs.2650 crore for the F.Y.2007-08. The same trend is also visible in the front of Net Profits for the company. This trend of increasing sales & profits clearly suggests that the company has a very good demand for its products domestically & internationally.

Concerns: However the above information is relating to the period when the current global rot and slowdown was not as pronounced until F.Y.2007-08. The global recession got more pronounced in the later half of the Calender year 2008. So, it is important that we put a spot light on the performance of the company in light of the results of various quarters of F.Y.2008-09 as well.

The company's Sales for the quarter ended December 2007 was Rs.575 crore. The company's corresponding sales figure for the quarter ended December 2008 are at Rs.550 crore only, a figure lower by Rs.25 crore than a year ago period. This clearly suggest stagnation of fresh demand for its products hit by global slowdown. However, the company's sales were relatively higher in the quarter ended March 08, June 08 and Sept 08 at around Rs.700-800 crore for each of the three quarters. But, even still, it reflects stagnation of demand which previously used to grow Q-on-Q.

Videocon & Alok Industries: On the other hand, it can be said Videocon & Alok has almost missed the seat in the bus ride from Sensex 8000 to 12000.All the 3 mid-caps are hit in someway or other by the Global Slowdown. On one side, the counter of Videocon is hit by lower tendency of consumers to spend on electronic goods during severe slowdown which is expected to gradually revive as the world economy stabilises and recovers over longer duration.

Alok Industries: Alok Industries is a very good pick to invest from the lagging Textile sector. It is one of the few stocks which has shown robust business model & performance as compared to other textile players on a consistent basis. On the other side, the stock of Alok Industries is still quoting at 87% discount to its life highs of Rs.105/- on the back of high Debt-Equity Ratio and increased competition from other cheaper destination sources.

This vertically integrated textile company has presence in 3 broad categories viz., Textile, Retail (H&A Stores) & Realty. The company has expanded its textile business in last few year both domestically & internationally. The company is also involved in distribution of textile products to the US supermarket chains. In near-term, the company is likely to benefit from depreciated rupee value at Rs.50.

Financial Performance of Alok: The company has a robust business model with increasing trend in its Sales for the last 5 years of comparison. The company's Sales for F.Y.2004-05 stood at Rs.1225 crore followed by Rs.1420 crore, Rs.1830 crore, Rs.2160 crore and Rs.2965 crore for the F.Y.2005-06, F.Y.2006-07, F.Y.2007-08 and F.Y.2008-09 respectively. This indicates a good demand for the company's products even whilst the ongoing global slowdown.

However, the Net Profits of the company has not tagged its course along with the trend of rising Sales along the last 2 years indicating pressure on its margins. Though, a part of this pressure on margins can also be attributed to the increasing cost of interest year after year on its debt position.

Major Concern for Alok Industries: The major area of concern for Alok Industries is it's high Debt-Equity Ratio. Though, with the recent Right issue by the company, the high debt ratio is likely to moderate to some extent. However, most of the company's interest liabilities for its long-term debt is subsidized under textile promotion scheme.

Financial Performance of Videocon: Videocon has been witnessing declining profit & sales since the onset of the ongoing slowdown. The company has been reporting declining net profits post March-June 2008 quarter. The fall in profits is even more alarming since Oct-Dec 2008 quarter to date.

Comparing its latest results for the quarter eneded January-March 2009 with its profits in the corresponding quarter in the previous financial year... the net profits have come down from Rs.251 crore in the quarter March 2008 to Rs.73 crore in the quarter March 2009.

The sales & profits of the company are adversely impacted by the current slowdown. However, the company has taken various steps to diversify its business right from Consumer electronic goods to Oil & Gas business. The company shall retain the lost ground as and when the recovery is visible in the economy over the longer duration as and when the consumers are willing to shell out more from their pockets.


Evaluating Downside Risks in case Markets Corrects:

Before concluding this post, we have to take a round-up about the prospects of the stock price movement of these 3 value picks in case markets take a 'U' turn from here or crash sharply to re-test its previous lows.

Gitanjali Gems can come down much aggressively as compared to Alok and Videocon in light of the fact that the stock has doubled up in last couple of months. Though, the down side looks reasonably capped on the back of buy back announcement by the company above the three digit mark which is a substantial premium to its current price. Also, the down side may be limited on the back of the company's strong fundamental standing as one of the few leading players from the Niche segment of emerging organized space of jewellery and retail branding. Investors can accumulate this stock in the range of Rs.45 to Rs.75 depending on the market fluctuation and opportunities.

The down side for textile player Alok Industries is also expected to find a cap around its Face value of Rs.10 and its Right Issue price of Rs.11. Whereas, over longer duration with a slight recovery in leading western countries and to some extent even domestically, the demand for products manufactured and distributed by Alok Industries is expected to remain robust and well diversified. Interested investors can accumulate the stock in the range of Rs.12 to Rs.16 on dips.

The downside support for Videocon Industries is placed around Rs.80-90 in the Medium term horizon. The stock is already closing below its book value and has strong downside cap around Rs.80 where its 52 week lows are placed.


Six other Stocks that could be considered for Value Buying on 15-20% Dips from Current prices:

1) Everest Kanto (Rs.90-120)
2) Patel Engineering (Rs.120-160)
3) Aditya Birla Nuvo (Rs.360-440)
4) Glenmark Pharma (Rs.120-150)
5) Bank of India (Rs.180-220)
6) PVR (Rs.60-80)

Note: Currently, Nifty is trading in a new range of 3150-4250 after a 5 month consolidation in the old range of 2500-3150. Whenever markets revert back to around Nifty 3150-3250 levels in future, the upper ranges mentioned for the above 6 stocks may be tested. At such times, long-term investors can start accumulating these Value mid-cap. However, more quantity to be bought only on larger dips as and when the lower range of the bands are reached near to.


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Investment Opportunities in PSU Banking Stocks

There is a query from Vikas in the Comments section regarding investments in PSU Banking stocks as related with its Dividend yielding capability acting as a 'likely' Fixed income opportunity.

Hi Viral,

My question to you is ... will it be better to invest in PSU banks. Banks like IOB & Andhra Bank has declared a dividend of 45% i.e., Rs 4.5/- per share.

I've noticed that most of the PSU banks gives regular dividends on YOY basis ( so your equity investment in these banks , more or less act as FD in the long run- as you get regular returns from them).

Please let me know your views on the same?

Vikas

My Reply:

To this, i would like to say that, there certainly is a degree of truth in his way of thinking. But, the point is not absolutely taken as there are many other stocks, both from public and private sectors, with past history of good dividend yielding track record and robust performance.

Most of the PSU stocks from sectors other than Banking & Financials are also well known for good dividend yields. Being Public sector companies, these PSU stocks are impliedly obliged to fill-up the coffers of the central government (and of course, other shareholders too) by the way of regular dividend outflows on account of their majority stake in the Companies.

Coming to the Private counterparts of PSU compaies... many leading private sector companies with good cash flows are also not behind in doling out good dividends on a consistent basis. In fact, many companies also have implied policy guidelines of forking out as much as 30-50% of their quarterly profits as dividends for their shareholders.

However, the above does not mean that i am against investment in PSU Banking stocks. In fact, PSU Banks is a very good sector to invest your money with a tangible bit of safety quotient. PSU banks have a certain stricter regulatory guidance than high flying private sector banks in terms of lending operations & risk taking.

Though, during times of optimism, PSU banks also have to deal with a bit of hump with issues like expansion, raising capital, etc. due to the same regulatory hurdles. In the current scenario of severe slowdown, PSU banks have somewhat caught up with market share of private sector banks to some extent. In stead of looking at PSU banks as purely Dividend yielding stocks, i would like to recommend you to stick with only Top 4 banks from Public sector.

My 1st Preference would be banking major State Bank of India (SBI). If you prefer Mid-caps among PSU banks there are some very good banks like PNB, BOB and BOI to choose from.

Now, from Valuations point of view SBI is a bit expensive when seen from the lows of Rs.900 it has established a couple of months back. Though, the stock would provide good investment opportunity for Accumulation below Rs.1150/- to start with & more on dips.

Among BOB, PNB and BOI...

BOB looks the most expensive but this largely backed by its robust performance in quarterly results. PNB is a relatively cheaper stock in terms of valuations and is biggest PSU bank after SBI. However, even this stock has almost doubled since its lows of Rs.300/- BOI certainly looks cheapest of all the major PSU banking stocks. However, this lag is on account of relatively disappointing results in comparison to other PSU banks. Anyways, the fundamentals of BOI are too strong to lag so much behind in terms of valuations.

From investment perspective, investors need to hold out for now before plunging in for buying fundamentally strong PSU Banking stocks. At the most, investors can hand pick few units of BOI which is relatively reasonably valued in comparison to other Banking stocks. However, investors can consider accumulating these stocks on large dips during a big pull back for the current rally.

In my List of Favourite stocks in the previous blog posts, i had clearly given a Buy call for SBI and BOB from investment perspective. But, remember... personally, i would prefer to have a nice blend of PSU banks & private banks in my portfolio, preferably in favour of private banks.

BANKING & FINANCIAL SECTOR: (15% of over-all Portfolio)

10% - Banking (6% PVT Banks + 4% PSU Banks)
05% - Non Banking Financials (NBFC)

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Medium-Term Broad Range: Nifty 3150-4250

There is a query from Dark Knight Abhay in the Comments section regarding Market Outlook from the Short-term horizon. He has bought a few trading stocks around Nifty 3600-3650 levels.

Hi Viral,
You commented earlier that if nifty has a weekly close of 3550,it may touch 3800-3850 levels. So do you still recommend that one should hold on till 3800?

My Reply:

In very short term , Nifty is largely range bound in 3600-3720 narrow band. Previously, when i had recommended an upside break-out for Nifty at 3500 levels which was a crucial hump for the markets, the recommended levels of 3550 was only for confirmation of risk-free new break-out trend. This break-out indeed happened for the good, and we tested almost 200 points higher @Nifty 3700 during one of the trading sessions in the previous week. A 200 point break-out on Nifty above 3500 is a good appreciation in actual terms.

In very near-term, markets are undecided about its next move & thus consolidating in 3600-3720 range. May be, quite possibly, markets are somewhat over-bought what with a humongous rally in Nifty since 2600 levels witnessed just a couple of months ago.

Dear Abhay...My targets of Nifty 3850-4250 are from the perspective of MEDIUM TERM broad range and not short-term horizon. Just like we consolidated for 5 months in 2500-3150 range , the next big trading range for markets from now on may well be 3150-4250.

That does not mean Nifty 3850 are up for grabs in a unilateral fashion in a vertical climb-up. Markets should, ideally, move down or consolidate before touching such dizzy targets. One never knows... may be, market consolidation within Nifty 3600-3720 could as well be a part of that much needed cool-down. In any case, if market surprises by unilaterally inching up following positive global cues, than the upside would definitely be capped around Nifty 3800-3850 before any other major up-move towards 4000-4200.

But, all-in-all, chances of a big cool-down in the range of 3150-3350-3720 is high for next few months seeing at the proportion of market rally we have had in last two months.

For Your Trading bets...
For BHEL, IDFC & Videocon i've clearly mentioned targets and Stop loss levels in my previous postings. IDFC looks strong unless it can sustain above Rs.82 on closing basis. BHEL has a strong support at Rs.1500. Two other calls were given in my previous post on Suzlon and HCC which are depicting strong trend on the upside. Stop losses are a must for any kind of trade be it for short-term or medium-term.

CONCLUSION:

My View: 3150-4250 is Medium-Term Broad Range.

Option 1: From here markets look over-bought in very near term outlook & Nifty may as well take a breather with Support @3500 & ultimate support @3350.

Option 2: Markets may surprisingly keep on rising if constantly backed by positive global cues. But, then, there may be an upside cap around 3800-3850 in short-term.

Chances for option 1 to fructify is strong, but one cannot rule out a small up-move from 3700 to 3850 in near term driven by continuous momentum around the globe. Momentum can sometimes over-ride fundamentals & valuations. Political outcome has the capacity to turn any form of trade on its heads.

I would say, book Part profits even in your short-term trades. When markets are so much inflated in so little a time horizon, it is better to play safe partly. Reduce your risk but still don't give up all your positions. Fresh Buying is recommendable around Nifty 3500-3550. And, an Aggressive Buy is thoroughly recommended around 3350-3450 range for Trading purposes.

Long-term Investors:

Investment Buying to be done around Nifty 3150-3350 range. Long-term Investors should wait with patience and perseverance. Markets have given a break-out on the upside after a long consolidation of 5 months. The old range of Nifty 2500-3150 holds no more & a new range of Nifty 3150-4250 has developed which will stay over here for quite some while. So, for those who missed value plucking around the bottom of Nifty 2500, can plunge in around Nifty 3150-3350 range which is somewhat a starting point of 3150-4250 broad range.

Most of the long-term investors have had a missed out feeling of not being able to buy around market bottoms. So, now these unleashed funds will come out for shopping on every dips and support the market on every dip and consolidation. So, funds on sidelines should maintain caution & patience. In the short-term, it would be difficult to see markets below Nifty 3350-3400 levels.

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