Money Bol » nifty

Case for a 50 basis points on May 3??

Praveen Bajaj — Sun, 01 May 2011 12:51:25 +0000

“Sakhi saiyan to khub hi kamat hai…..mehngai daayan maare jaat hai….” goes a number from a popular bollywood flick and rightly so atleast for RBI.

Since the last 15 months or so…RBI has been trying to battle the rising inflation by raising rates (What are policy rates?) eight times since March last year. However inflation, now it seems, is getting out of RBI’s control. Over the last one year, there have been many a concerns over structural bottlenecks in the economy which have been causing inflation. Well this might be true, I am not arguing against that. But even if Government decisively acts against structural cause of inflation, it would be some time before anything (like improving storage warehouses, improving transportation facilities, improving public distribution system etc) can be done and it impacts the mighty inflation.

The onus thus totally has been on RBI to manage or rather control inflation. Governor Dr Subbarao is trying to get atleast his inflation forecast right by constantly revising the inflation expectations upwards in all the subsequent policy reviews rather than taking aggressive steps to curb the price rise. Till now RBI has been taking baby steps by raising 25 bps almost every 45 days. The same has had an impact on inflation but only marginally so.

Inflation going forward

As per the last release, WPI for March’ 2011 rose to 8.98%, shying away from the 9% mark. Going ahead, I expect price pressure to see more upside post elections due to long pending diesel price hike. Good monsoon forecast by IMD may cool down the expectations but it would be some time before which the same may actually impact the primary articles price. Going by last year’s experience, even good monsoons might not have any impact on the prices.

Compromising growth

Growth, which is a trade off for higher interest rates, has been moderating. Latest GDP showed slight moderation in the last quarter’s growth rate. It is still some time before we get the first quarter’s growth rate. IIP numbers have also been moderating. Inspite of this moderation, I feel there is still some room for RBI to compromise on growth front. As i said in my last post on the same topic (Monetary Policy January), rates are still way below the highs observed during last growth phase before Lehman Brothers fiasco and another 100 bps on repo would not put the economy in any sort of trouble.

RBI clearly has two choices, either to let inflation chop off a few points from the growth rate or to itself step on the growth temporarily and try to tighten its grip on inflation. At the same time, it seems there has been some lag in the transmission of tight monetary policy to the commercial banks. Deposit rates and credit rates to general public have not been impacted to a large extent. Cheap home loan rates existed till recently. SBI put an end to its teaser loan rates only in the last week upon pressure from RBI.

Expectations and impact on equity markets

Thus in the coming monetary policy announcement on May 3, I would expect Mr Subbarao to come down heavily on inflation by going for a more aggressive 50 bps hike in repo rates and take steps to induce commercial banks to raise deposit and lending rates.

If both these factors are accepted by RBI, markets would be looking for some more downside even after a 135 points fall since April 21. Banking stocks would obviously be worst impacted who would be forced to raise atleast the rates and sacrifice their margins.

Author:Praveen Bajaj

July Could be Jittery For the Markets

Praveen Bajaj — Wed, 30 Jun 2010 16:52:13 +0000

The month of July can cause real jitters for the Indian stock market and the party could end. Most of the top economists and market gurus have started saying that the year 2010 could be a mixture of two halves, the first half ending on a positive note and the second half leading to a sell off and a economic downturn.

There are 4 big events in the month of July because of which I believe markets may end lower in the month of July

1. First which I had already discussed in my previous post is the $30 billion IPO, by the China AG bank,
which could suck the liquidity out of the emerging markets and thus leading to a fall

2. Second in July only, perhaps in the later half of the month the EU will come up with its bank stress test
results and without any plan so as to how it would provide any kind of support to the ill banks the results
may provide another reason to sell the financials and other related stocks around the world

3. Third, from 17th July, Nifty futures will be traded on CME and this move is taken in order to facilitate US
investors to take exposure in Indian markets without facing the hassles of cross border investing. This, I
believe might lead to a liquidity crunched Indian markets

4. On 27th July, is the RBI Q1 credit policy, with statements from the governor that inflation being the
bigger concern than the EU crisis, and the recent fuel price hike, I believe it sets a strong case for the
RBI to go for a rate hike (and I think it might come as a surprise well before the actual policy date). The
Indian banking system which is already liquidity crunched because of the 3G and BWA auctions could take
a serious hit if this happens. The Bank Nifty falling by around 3% on Friday just after the fuel price hike,
signals the market expectations of a rate hike.

Thus, I believe that the best one could do in July, is to avoid long position and traders can also use low IVs as a tool to go short using the put options.

Be Cautious & Happy Investing…!!!

Author name:Rahul Sonthalia, Research Head, Kredent

To see other posts by the same expert click here

China Economy Update

Praveen Bajaj — Wed, 16 Jun 2010 03:02:34 +0000

In Economics the term stagflation refers to a situation where the inflation rate is rising along with a fall in output levels.

Many eminent economists believe that In China, this could be a possible situation shaping up. Some of the most recent facts that highlight the same are:

On Friday the Chinese government released the figures for CPI and IIP. On one hand the CPI figure for the month of May was at 3.1%, above the street expectations and on the other the IIP number for May was below the street expectations at 16.5%.
The Other Indicator which points out that the Chinese economy has already peaked is the OECD’s composite lead indicator. (For More Details you can use this LINK to download our report on the same)
The Chinese government over the last week did not receive enough bids for any of its bond auctions to be fully subscribed. The reason attributed by the investors is the rising inflation concern in China and low yield offered by these bonds
Last week, the Steel prices in 30 of China’s major province has declined for the 7 straight week
According to China’s Commerce Ministry, the debt problems in the EU will impact Chinese exports in the coming months. The ministry said that it t typically takes Chinese companies about 2 months to fulfill orders, so May’s shipments reflected order books before the EU crisis deepened
The only positive news that came out lat week form the China front was that its exports figures grew by a whooping around 50%,

Thus we strongly believe that the macro economics events shaping up in China is a cause of concern for the global economic recovery and specially for the metal and mining space. Thus we would advise investors to remain cautious as the Nifty Index again reaches the levels form which it had retraced in the Past

Author name:Rahul Sonthalia,Research Head, Kredent

Trading Nifty as global liquidity dries up…

Praveen Bajaj — Fri, 11 Jun 2010 19:14:19 +0000

This Could Evaporate Liquidity From Markets...

Yesterday the European Central Bank (ECB) announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that “EURO is a stable currency’ and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that it is more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world’s biggest IPO of all time. On July 16th it is coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same Ag Bank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing…!!

Author:Rahul Sonthalia, Research Head, Kredent

Equity market round up: May 29, 2010

Praveen Bajaj — Mon, 31 May 2010 03:23:52 +0000

Helped by the 1.2% gain on Friday, equity markets posted 2.5% gain this week to close at 16863.06. This is the highest monthly gain since March 6.

Markets started the week on a bearish note and on Tuesday fell about 2.7% under the concerns of widening European Debt crisis and possible military actions between North Korea on one side and South Korea and US on the other side. But later in the week, short covering ahead of the expiry of the May contract and strength in the world equity markets led the markets to a considerable upside and gains for three consecutive days. World markets found strength after the Chinese Central Bank, People’s Bank of China (PBOC) said that Europe will remain its main investment market and Beijing would support actions to help Europe resolve its debt crisis.

Next week would be a busy week in terms of data release. On the start of the week, GDP data for Q4, FY 2009-10 will be released. Apart from this, companies in cement and steel sector will release their sales figure. Perhaps a more closely watched event will be progress of South west monsoon which is expected to hit India early next week. Any delay in arrival of monsoon will spark inflationary concerns and might lead to an increase in interest rates which is negative for the markets. Most of the bad news about Eurozone has been factored in the markets and any downside due to any unwanted developments on this front will be limited.

Author name: Praveen Bajaj

Indian equity markets:Overvalued Zone…?

Praveen Bajaj — Tue, 13 Apr 2010 10:16:33 +0000

Well some say that the Indian equity markets are all set to become mother of all the bull markets and from here there is no looking back. While others say that we are currently in a kind of over bought zone and a correction of at least 200-300 points in the Nifty index is definitely warranted.
While, what i see this is as the events holds the key to this. In the month of April there are three very important news flow that will shape the directions for markets:

The Q4FY10 earnings of India Inc.
Indian WPI for the month of March
RBI’s Q4 credit policy release on 20th April

While inflation is a cause of concern, given the way the food price and other key individual indices are behaving, this will also have a major impact on RBI’s Q4 policy guideline. I believe that there is a strong possibility of at least a 50 bps hike in the key policy rates. This I believe could be a problem story for the ever singing markets of ours.

On the other hand the corporate India is expected to show decent Q4 numbers, however much of this growth I believe is already factored into the stock prices and hence there is nothing much left on the table that should excite the investors. Infosys Q4 results tomorrow morning will set the stage for the rest of India Inc.

Hence, I strongly believe that instead of chasing the markets at a broader level, it makes sense to invest in good stocks with reasonable valuations.

As Mr. Lynch Says
“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.” – Peter Lynch

Author name: Rahul Sonthalia, Research Head, Kredent

BGR Energy: Building the Indian Power Story

Praveen Bajaj — Wed, 24 Mar 2010 11:19:39 +0000

Last week I heard a very interesting story which eventually gave me the idea of investing in BGR Energy Systems Ltd. Thought of sharing with you.

Years back when the South African Government opened their country for outsiders to come and do mining for diamonds, entrepreneurs form all over the world rushed to South Africa in the hope of finding diamonds and changing their fortunes. Of them only very few were able to do so and become rich. But there was one African business man who instead of joining this rat race to discover diamond started the business of selling/renting hammers and other mining material whoever was coming to discover diamond. He eventually became a millionaire and one of the most successful entrepreneurs of this Diamond run.

I hope some of you must have realized the point I am trying to put here. In India currently most of the companies are running to set up the power plant to generate power and other half are running to build the great power generating turbines or boilers. But very few are there in the business of building the Balance of Plants (BOP) which accounts for more than 35% of the total money spent in building up a power plant.

Thus, I strongly believe that there is a huge potential in this sector and BGR energy being the undisputed leader with a strong order book and execution track record offers great long term investment opportunity.

I would recommend one to start a SIP form of investment in this stock for a minimum of 2.5-3 years period, since at the current levels investing lump sum might be a little dangerous given the market conditions.

Happy Investing…!!
Author: Rahul Sonthalia, Analyst, Kredent Group

Currency markets at crucial point….

Praveen Bajaj — Mon, 15 Mar 2010 09:45:23 +0000

Markets seem to come out of the consolidation mode and increase in risk appetite saw the US Dollar being sold across the board. Almost all markets closed in the green and all currencies except the JPY saw strength against the greenback. The Dollar index closed below a key support level at 80 before closing 79.83. Sustained move below these levels would initiate further downside for the dollar. The Euro saw movement of 250 pips with 1.3800 being tested on Friday in the European market. The INR strength continues buoyed by strong fundamental coming on the back of a strong IIP numbers for a second month in a row. Movements on both side were very erratic with 45.38 levels bringing in importers and state bids while 45.63 level bringing further shorts into play. We would maintain an intraday range of 45.38-45.63 with bias tilted towards buying the dips. Technically 45.28 is yet to be tested and exporters are “not yet” panicking. Once exporters start panic booking with a simultaneous drop below the 45.28, it is likely to bring further downside.

Market Developments
Global Outlook

The US Dollar fell against all majors except the Japanese Yen, breaking out of its tight range against the Euro and testing its recent lows. A limited week of economic event risk initially left the heavily-traded currency relatively motionless, but the latter half of the week saw the Greenback considerably lower through Friday’s trade. The declines were perhaps surprising given a significantly stronger-than-expected US Retail sales report on Friday morning; robust spending gave modest hope that the US consumer may prove more resilient than previously predicted. CFTC data is mixed with Dollar’s net long positions fell from $5.58 billion to $3.99 billion, however Euro shorts rose to another record of 74551 contracts suggesting that 1.3800 would be hard to break. After the break of 80 levels in the dollar index we feel that 78.56 would a decisive level to watch. A busy week of economic event risk likewise promises considerable volatility in the days ahead.
EUR/USD was encouraged by better equity market and stronger than expected EU Industrial Production to hunt for stops through 1.3750, despite initially hampered by Russian selling. Prices made a run close to 1.3800, but lost momentum. Equity markets were majorly buoyant for the major part of last week with S&P 500 breaking January’s high of 1150. Nikkei managed to rise 382 pts to close at 10751. Markets are cautiously looking at the upside after the consolidation which has lasted for almost two months. However only a weekly close above the 1.3800 levels should show more upside. Market is still short ahead of FOMC next week and that’s going to limit dips within a range of 1.3600-1.3800.
The British Pound rose to 1.5200 levels and may continue to rise if the Bank of England is able to convince the markets about its current stance The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. Rating agency Fitch said the UK’s AAA credit rating may be jeopardized if it doesn’t do more about its fiscal shortfall reminding us that political risk could be a major factor in the United Kingdom.
Commodity currencies continue to be bullish on the backdrop of strong economic data from Canada, Australia and New Zealand. Australia is the first country to raise rates to 4%. RBNZ left rates unchanged at 2.5% and reiterated the already stated stance of removing stimulus in the middle of 2010. The key risk for commodity currency comes from the tightening policies to cool down China.
Key Data for the coming week are Euro-Zone Employment and US industrial production on Monday. Tuesday would be crucial with Euro-Zone CPI, ZEW survey, US Housing data and the most important FOMC rate decision (rate may not be hiked but the wordings need to be watched). On Wednesday we would see the UK Jobless and other unemployment figures for the UK with Thursday bringing focus back to the weekly jobless claims. Friday would see housing, retail sales coming out of various regions.

Domestic Outlook

USD/INR saw downside for most of last week, though dips below the 45.40 saw importer buying interest amid intervention fears as well. As a result of such buying interest some the pair staged some sharp rally towards the upside all of which faltered at the 45.63 level. SENSEX gains aided with the INR upside though stock market gains were trimmed on fears of rate tightening on strong Jan Industrial Production for a second month in a row.
Inflation data next week is to be the focal point and is likely to be higher on the backdrop of high weekly food prices. However we expect food inflation has peaked out and the same effect would be reflected on the WPI in the coming month which could settle in the range of 7-8%. The borrowing programme still being largely front loaded with almost 70% of the government borrowing being done in the first half is likely to keep yields in the 7.8 % levels for some time. On the whole we expect that the USD/INR to gradually tilt lower, but dips would not be very rapid till exporters start panicking. Broader range of 45.28-45.75 is seen being traded for now as the USD/INR consolidates with eyes on policy at home as well as external risks. Intraday range of 45.38-45.63 should hold as state bids and underlying strength of the INR unlikely to let the pair go either way. One more factor that might be a food for thought is that markets have started looking at the Real Effective Exchange Rate (REER) which is hovering at 112 against a historic high of 116. It remains to be seen how far the central bank stays on the side lines.

Infosys result analysis

Praveen Bajaj — Wed, 13 Jan 2010 11:34:16 +0000

Infosys declared its third quarter result today. The results came better than than the street expectations. The sales were around 3% above the Bloomberg consensus estimate, whereas the net profit was around 12% below, which was boosted on account of higher other income.

BSE : INFOSYS

NSE : INFOSYSTCH

Bloomberg : INFO IS Equity

CMP : Rs. 2,587.45

Sector : IT Services

View : Neutral with positive bias

RESULT HIGHLIGHTS:

The consolidated net sales for the quarter ended December 09 contracted by 1% to Rs. 5,741 cr, this was mainly on account of recovery by the North American Financial Services Sector
Its other income grew by a whopping 505% to Rs. 230 cr this was on account of a Rs 20 cr gain from forex transactions as compared to a Rs 218 cr loss in Q3 2008
Company’s net profit contracted by around 4% to a level of Rs. 1,582 cr, this is mainly on account of a strengthening of rupee on a YoY basis
Company’s operating margin remained fairly stable around 35.5% on account of increased utilizations
Company’s diluted EPS fell by around 3%, to Rs. 27.72/ share
The company plans to be aggressive on the hiring front. It plans to add 6,000 employees to its rolls in Q4. It is comfortable with utilisation between 76-80%
Its Q4 guidance is muted but has improved compared to the last quarter’s guidance and the company has also increased its full year EPS and revenue guidance both in rupee and dollar terms
The management says clients are still cautious about the business environment and budgets from the clients side has not been finalised yet

Dollar Guidance:
- FY10 consolidated revenue seen at USD 4.75-4.76 billion, YoY growth of 1.8%-2.0%.
- FY10 EPS seen at USD 2.26 a share, YoY growth of 0.4%

Rupee Guidance:
- FY10 revenues seen at Rs 22,473 cr-Rs. 22,519 cr, growth of 3.6% to 3.8%
- FY10 EPS seen at Rs 106.85-107.06, YoY growth of 2.2% to 2.4%

Author: Rahul Sonthalia, Analyst, Kredent Group

IIP Data: November 2009 -Index for Industrial production

Praveen Bajaj — Wed, 13 Jan 2010 11:05:39 +0000

The IIP figure for November stood at 11.7%, taking everybody’s breath away. It stunned everybody since the market’s expected figures was hovering around 10%.The same index registered a growth of 2.4% y-o-y in Nov’08 whereas a growth of 10.3% (revised) y-o-y in the last month
It grew at its fastest pace in two years which was the after-effects of the festive season and also strong global cues. It thus supported the story of improved industrial activity in the last few months and thus, is an indication of a faster economic recovery in India
This number will help RBI to decide for an increase in the interest-rate. It is likely to withdraw liquidity from the market and very soon pull back the monetary and fiscal stimulus on the excellent performance of the manufacturing and consumer durables segment
The manufacturing sector grew by 12.7% y-o-y compared to 2.4% in Nov’08 y-o-y on account of increased manufacturing activities. This sector has seen a huge jump in figures, the reasons being increase in factory outputs and increase in steel consumption by 8% during the first 9 months of the current fiscal. Manufacturing grew by 11.1% in the same month of the last year
The electricity sector increased to 3.3% from 3.1% in Nov’08 y-o-y. It grew by 4.7% respectively in Nov’09. the numbers posted in this sector are very fluctuating and they have a volatility of 3-4%
The mining sector, posted a growth of 10.0% against 0.5% in the same month of the last year. It grew by 8.2% in Nov’09 y-o-y. It has been consistently showing good performance since the last few months and is expected to continue this trend
In the use-based category the basic goods, capital goods and the intermediate goods sector registered a growth of 6.0%, 12.2% and 19.4% y-o-y respectively compared to 2.3%, -2.3% and 2.6% y-o-y respectively in Nov’08. The growth in the basic goods doesn’t seem to be constant while the capital goods was driven by an increased demand from the industries
The consumer goods sector has grown by a satisfactory 11.1% y-o-y compared to its growth of 4.4% in Nov’08 y-o-y. The sector’s growth was driven by a boost in the consumer durables segment which grew by 37.3% y-o-y, a huge increase from -4.2% in Nov’08 y-o-y. Increased demand in automobiles, strong consumption pattern and surge in demand of other durable products led to a significant increase in it. It was the consumer non-durable goods which did not perform well, registering a growth of 3.1% compared to a growth of 7.3% in Nov’08

Author: Rahul Sonthalia, Analyst, Kredent Group