Coal India : A Delisting Candidate???

On Friday, 24th August 2012, Coal India was one of the leading stocks in the bourses. It closed at 367.05 up 2.2% with a robust volume of 4.47 Million shares. Its average trading volume for the past 6 days has been around 2 Million shares. It has crossed the 360-362 level resistance commendably. Thus, from the technical point of view, the stock is all set for rising further. Several experts may come out with a buy call tomorrow for the stock given the fact that no bad news came regarding the stock over the weekend and the foreign markets also closed strong on Friday.



The major news driving the
stock were two, or that is so as per the various news articles. The first one is certainly the one that is not letting the parliament function. The Coalgate Scam! Our ever benevolent prime-minister Mr. Manmohan Singh wants to answer the opposition regarding how what he did was the best choice and that there is no scam as such but its CAG which is leading a defamatory drive against the government (pun intended). But, the opposing leaders are not keen to hear the monotone of our 'Lotus-like' (A flower surrounded in mud) prime-minister on this because somehow they feel that 'Lotus' is their proprietorship (Again, pun intended!).
FM Mr. P Chidambaram, Law Minister Mr. Salman Khursheed and Coal Minister Mr. Sriprakash Jaiswal organized a press conference to answer the queries of the press regarding the CAG report. The FM's argument was a little funny, to say the least, that there is no scam till there is no mining. That is to say that since the allotment of the coal fields to the companies, most of them have not mined the coal from the fields allocated to them and hence this should not be considered as a scam as the coal is still in the 'womb of mother earth'! God save India!!!
It's the same kind of defiant argument which a rash driver makes when you ask him 'What if your bike would have hit me?' He would say, "Lagi to nahi na?"
I agree that the amount mentioned by CAG is highly inflated and even at 2005 prices, these are exorbitant to say the least. But, the point that CAG has raised is that there has been tweaking of rules and pouring of favors to sycophants in case of coal allotment. Whether a natural resource like Coal has to be given out with an arbitrarily fixed price or through auctions is a matter of a country's policy and there can be debate over it but that cannot be labeled as a scam. However, asking bids for one mine and allotting three for the same project is something which is what has created the whole furor here.


Anyways, the debate is going to be a long drawn one. Both the leading parties of the country are involved in it in one way or the other. And till the time it rages on, there will be policy paralysis in terms of coal reforms and allotments of fields. Most likely, several fields would be de-allotted as the government has the habit of going back into its defensive cocoon on every such issue. The situation in this case is worse because Coal India does not have a public-face committee like TRAI as in the case of telecom. Government is the biggest stakeholder and the soul decision maker (any doubts?) here and they would try to curtail as many controversies as they can for the next one year or so. And what's the best way to do that than by not doing anything?



The power sector will be the one that will be directly hit. There will be huge coal imports in the coming days as the coal controversy would start to choke the power plants which are already running at pathetic PLFs (Plant Load Factor). The banks and financial institutions would be the next contingency as the leading banks of India have lent more than 2.5 Lakh Crore to the power sector and have been waiting for recovery for so long. Banks profitability will take a deep hit as and when they start to realize such loans as NPAs (Non-Performing Assets). The power producers would be forced to increase the power rates (some have already started it) and this would hurt the industries and common people tremendously. All in all, the contingency effect will affect everyone. To me, the situation visualizes like the one in which a man (here country) has been held by his throat (here coal production) and now slowly his whole body is giving up.
If the Coal India board does not act on its own to take care of the situation, there do not seem to be rosy days for the company in the near future amidst the controversies.


The next important news, and the one which actually inspired me to write the blog, is the buzz regarding Coal India promoters' willingness to ask for the power to buyback shares in the upcoming AGM on 18th September. Now this is interesting and if true, has a potential to drive the stock beyond 400 levels too. But why does Coal India want to buyback its shares when it has only recently gone public? In general, why do companies go for a buyback? Companies go for a buyback if they feel that their shares are undervalued in the market or they have huge cash pile and they do not want to spend it on dwelling out dividends to the stakeholders or they want to slowly delist from the bourses.


Another theory doing the rounds is that the government wants to use this as a means to meet its divestment target by selling a part of the 90% stake back to the company. But this is something which does not make much sense given the point that as per SEBI's guidelines, any public-sector listed company has to ensure a minimum of 10% public shareholding and if it is not so, then it has to be done within a couple of years, precisely by August 2013. (The same norm for private sector listed companies is set at 25%.) Buyback of shares by Coal India will pull back shares from the retail investors too as SEBI's regulation says that the retail investors' should have a 15% quota in the share buyback through the tender route. This would push Coal India further from the requirement of minimum 10% public shareholding of its equity. Otherwise ofcourse, if the company plans to divest again as and when the economic situations improve.
So, I think, the company is ONLY seeking for the power of a buyback and would not be doing so soon. Thus, this rally in the stock is not going to last longer.


But what if the company wants to delist itself from the bourses in the coming years. Or rather it is forced to do so as the choking economic conditions do not let it to divest its shares by the time the deadlines arrive in a couple of years. Several companies with very low public share-holding will be taking this path in the coming future. Delisting of Coal India would make a lot of sense for the government too as the government might not be very comfortable with sharing the reins of a cash cow with the public and other big investment firms (Read TCI) which have the capability to sue the government on corporate governance issues. With the whole of Coal India to itself, the government can go on with its arbitrary decisions in the name of nation-building without any resistance whatsoever.
Well, I may be a little prejudiced against the government on this. So, lets not stretch it any further on what is in the GOI's mind.
Lets look at it from an investor's point of view. Generally, a share buyback or a scrip delisting leads to a lot of appreciation in the share prices.
Lets have a look at some of the recent delistings:



Stock	Price on delisting day	Movement after delisting buzz
Patni	515.8	38.44%
Atlas Copco	2720.75	46%
Nirma	255.65	18%
Midas Pharma	28.55	35%
Alfa Lavel	3946.5	79.1%
Astrazeneca Pharma*	1883*	51%*

*Astrazeneca is yet to be delisted.


There have been some stocks which have shown negative movement after their delisting news but they are very few and the depreciation has also been limited. Thus, what I intend to suggest is a delisting candidate holds a lot of promise of price appreciation for a retail customer. And if the company is a blue chip like Coal India, one should certainly not miss out on it.
Some other probable candidates for the delisting buzz within the next year are Gillette India, BOC India, Purvankara Projects, DB Corp, Blue Dart, Novartis India etc. 

Trading Strategies - A Calculated Risk Game!

Today I was asked in the class as to what trading strategy I follow?


In fact, there is no single trading strategy that fits everyone and every market. As for me, I have two different strategies to trade in the market.


The two strategies distinguish the two types of markets we mostly come across:
1. Trending Market i.e. the prices are moving on one side, either high or low, with considerable volumes
2. Range Bound Market i.e. the prices are fluctuating with in a range and volumes are sluggish


Here, markets and stocks can be thought of as inter-changeable.


To trade the trending markets/stocks is probably the simplest one with the caveat that you can spot the trend early. The simple rule that all know, however, I am telling just for the sake is that you try to buy low and sell high to make profits. Now, if you find a stock with increased activity, read volumes, and there is a positive price action too then it signifies that people are lapping up the stock for some or the other reason. This could range from a positive earnings forecast to forex gains due to rupee devaluation or strategic loss to one of the company's close competitors! This increase in the activity is called 'Open Interest'. An increase in the open interest with an increase in the prices means a bullish outlook for the stock. An increase in the open interest with a decrease in the prices means a bearish outlook as more and more traders are looking for selling the stock i.e. the market sentiment is going against the stock.

A successful trader always (and Always) trades with the trend! If you feel that you want to buy a falling stock or short a rising stock for its valuations have peaked/plummeted beyond rationale, then wait patiently for the tide to turn. Until and unless, the broader market starts to feel the same way you do, you will lose more often than gain.

Trading the trend through breakout/breakdown method is something I have recently learnt through a Facebook community ("The Dragon's Cave") where the daily charts of the stocks would be analyzed and depending upon whether the chart pattern is making a breakout i.e considerable rise in prices with considerable rise in volumes or a breakdown pattern i.e considerable fall in price accompanied with considerable ride in volumes, trades will be initiated along the trend. With the knowledge of technical analysis, one can decide the appropriate price targets and the stop loss. Technical analysis also helps you to identify the various signaling patterns like the Triangle, Wedge, Flag, Pennant etc. which help to foresee favorable patterns on the anvil. After this point, its only about discipline that whether you can let the market do its own thing or not. Lowering your stop-loss as the market goes lower is a sign of fear and indiscipline and should be avoided. And similarly, once your target is achieved from a particular trade, do exit there and then.Fear and Greed has destroyed good traders worldwide.
The trade duration in this case, generally, varies from 1 day to 10 days.


To trade rangebound markets or stocks is a little tricky. The one method I have found considerably profitable is identifying the range in which the stock is trading, waiting for the stock to move to the lower end of the range on any dull day and pick it up there. Put a strict stoploss at a price which is below the lower end of the range by {0.5*(difference of the highest and lowest point of the range)}. There is no definite explanation for the selection of 0.5 factor here. You can change it as per your risk appetite. The strategy pays off mostly in situations where neither the bulls or the bears have a clear dominance. The trade, in this case, can last from 1 day to 4 days mostly.





The above chart of 'Aban Offshore Ltd' shows different chart patterns which when properly analyzed can be used for profitable trades.


At the end of it, any strategy can fail even after the best of the efforts put into it. However, without the spirit of taking calculated risks, there is no fun in life whatsoever. Some find that in trekking mountains, I find it in the Red-and-Green blinking Quotes! :)

Venky's - The Juicy Legs

Today, I read a very interesting article in the Economic Times about how the import restrictions on the famous & delicious leg piece has led to a demand burgeoning and thus an increase in the prices of the chicken leg piece. What's more interesting is the fact that an imported leg piece from the US would cost 45% lower than what we get here from the domestic poultry farmers. The reasons are many and we would not be discussing poultry farming here. But what we are going to look at is how Venky's (India) Ltd. has benefited from this particular piece of news. Venky's is one of the biggest poultry breeding & farming company in the country.  It also produces Animal health products and S.P.F. Eggs (Specific Pathogen Free Eggs) used in the manufacture of Human, Animal & Poultry vaccines. In fact, it is the only commercial producer of SPF chicken embryos in India.
Venky’s is also the prominent supplier of chicken products to various International Quick Service Restaurant chains in India like Kentucky Fried Chicken (KFC), Pizza Hut, Domino’s, TGI Friday and Vista Foods etc.


A quick snapshot about the company:
Market Cap: 499.6 Cr (as per Aug 17 closing price of 532.95/share)
EPS: 54.08   P/E: 9.84  Book Value: 336.25


 




The two ovals show the spurt in the trading volumes of the stock along with a breakout in the prices of the stock. This is an indication of a bull trend for the stock. The stock is trading at its 52 week high at the back of good earnings from the quarter ended June 30,2012. The bull trend is to continue till the stock trades above the levels of 518. The levels around 578 have considerable resistance for the stock and trendline from the recent lows of 315 also intersect at the recent peak of 576 or so. Thus at levels of 530, the stock can be traded with a stoploss of 515 and for a target of 578 or higher.


Lets look at its MACD charts which reiterate the same story more or less:



 
The MACD is showing positive momentum for the stock and is trending firmly above the 0-signal line ensuring strength in the coming days. The stock is generally a low volume stock and if the previous breakout is anything to go by, the present high volumes will finally  peter out and the stock will consolidate before making the next move, up or down.


Now, after the Economic Times' article (Here), I think one should keep Venky's (and similar stocks) in one's radar as a potential investment candidate. One can always get such chances as and when any poultry related epidemic breaks out. No doubt the traders will start to short the stock on such news.
In fact, some other stocks which are engaged in similar fields can also be looked into for the same story. One such stock is Srinivasa Hatcheries which holds a franchise from the Venkateshwara Hatcheries Group, the parent company of Venky's. 

Wire & Wireless Limited: A Scam or A Story?

W&W was at 8.41 on 24th May 2012. Yesterday it touched 24.2. A price appreciation of 188% in a matter of hardly 3 months. The prices have been constantly going up for the stock. Lets see what has been the driving force behind it.



 Screen clipping taken: 8/17/2012, 8:17 PM
Price appreciation along with the increase in volumes (the red and green towers) indicate that more and more people are taking interest in the stock. But after an appreciation of over 200% in 1 year, is there any juice left in the stock?




W&W is an Essel Group (Remember Zee Channels, ICL, IVRCL) company and one of India's largest Multi System Operators (MSO). An MSO simply means a cable company and since most of the cable companies run cable systems in more than one communities, they are called as MSO.


It has a market capitalization of 1024 Cr as of today. So, in 3 months the company's market cap has almost tripled!


The story goes on like this : There is a wave of cable digitization that is to happen in the country starting with the four metros and then spreading on to other parts of the country. TRAI (Telecom Regulatory Authority of India) is in charge of it to ensure that a smooth transition takes place where the agreements between the major stakeholders, Broadcasters & MSOs and Local Cable Operators (LSOs), are such that it creates the maximum value for the end users. Like several other ambitious projects, this has also been delayed and pushed ahead with a new deadline, time and again. Earlier, it was all set for a June 30 release but at the eleventh hour the deadline was pushed to an October 31st rollout. The reason expressed were something like this:


"The assessment of ground realities indicated that smooth transition from analogue regime to digital regime wasn't possible because seeding of set top boxes (STBs) in cable viewing households was not satisfactory. This compelled the Ministry of I&B to set a new deadline ." (Moneycontrol.com)


Apart from that, the other reason was the delay in the announcement of tariff guidelines and other necessary rules and regulations related to interconnections. So, when the deadline started to approach quickly, the players were not ready. Now, it is expected that come 31st October, the country will be ready to move from a massive analogue regime to an ever-advancing digitized regime.


So, basically the company is riding on this expected outcome. But the event is atleast 3 months away from now and so much of expectations have already been built up in the stock. How big is the earnings expectations from it?
Before looking at what Digitization is promising us, lets have a look at the quarterly results of the company. The company posted a revenue of Rs 75 Cr for the quarter ended June 30 and bore a net loss of Rs 13.51 Cr. In the previous quarter, it had posted a net loss of Rs 20.17 Cr! In fact, the company hasn't made any profit in the past 5 Quarters!


Then, Digitization must be a game changer.


The benefits of Digitization are better reception, better synchronization of sound and picture and an over all richer user experience. Subscribers can choose their channels on a la carte basis. But it involves a huge cost and which is why only the big and mighty have taken the leap.
The size of the TV industry in India has grown at the rate of about 12.2% p.a. since 2007.





We are the 3rd largest by pay-TV subscriber numbers in the world, next only to China and US. And the penetration of digital TV is only 36% in the country, so far. Digitalization is expected to bring addressability into the
system, superior viewing experience and value added services (VAS) which in effect would have a positive bearing on the ARPU, which today is one of the lowest in the world.


Television has three major streams of revenue (the approximate contribution of each is mentioned in brackets):
1. Subscription Revenue (63%)
2. Advertisement Revenue (33%)
3. Television Content (4%)


The subscription revenue is what you pay to your local cable operator (LSO). This is shared among the broadcaster, the MSO and the LSO. There are more than 50,000 LSO in India while there are more than 7000 MSOs and 6 DTH operators. The top 5 in the MSO industry hardly account for 1/3rd of the total revenue as most of it, upto 75%, is gobbled up by the LSO through under-reporting of subscriber numbers. With digitization, this will change dramatically and the role of the LSOs will either be tragically terminated or drastically reduced. This will lead to a huge realization of revenues for the established players of the industry.


A report by IDFC suggests that there will be 86 million digital homes by 2015 - 4 times today's number! This would convert into an incremental revenue realization of as high as 50% from current levels.
Smart investors have already gauged the next big thing. Thus even if the highly taxed (as high as 40%) and inefficient industry is posting losses after losses each quarter, the companies are being lapped up for the day when the whole of Indian Television panorama will be digitized and TRAI words "sunset of analogue transmission on the cable by December 2014" will be a reality.


At this point of time, it would be a good idea to have a look at what other stocks in the same industry have done in the past 12 months:



Stocks	1 Yr. Ago	CMP	Change%
WWIL	6.79	22.65	233.58
Den Networks	42.8	123.5	188.55
Hathway Cable	85.9	184.15	114.38
Sea TV Network	21.05	54.1	157.01

ITC in Pain

The biggest news for today was that the Australian government banned the branding of the cigarette packets. What it meant is that the cigarette companies have to sell their products without the logo of the company. This is a serious issue as far as the brand marketing is concerned. After all, we feel a sense of pride while smoking off Marlboro and look with awe at Philips Marlboro to have given us that. The news hit all the global cigarette makers as was expected and almost all of them registered losses in today's trade.
Philip Morris (-0.5%); British American Tobacco (-1.9%); Imperial Tobacco (-1.7%)


ITC shares fell 3.6%!







The question is Why a big conglomerate which boasts of more than 60% revenues from its non-cigarette businesses like FMCG, Agri-Products, Paper, Hotels etc gets hurt so bad everytime its cigarette business faces challenges?


ITC used to garner almost 90-92% of its bottomline from its cigarette's business before 2002. At this juncture, ITC thought of reducing its dependence on Cigarettes as they(Cigarettes/Tobacco) are being targeted by the regulators worldwide for being the biggest reason for the avoidable deaths. In the past 10 years the company has invested around Rs 5000 Cr into its FMCG business with launches of numerous brands  every year and most of them being advertise by big bollywood names (Remember SRK eating SunFeast Biscuits and Kareena bathing with Vivel Soaps).
Cigarettes still make about 75% of the company’s bottomline while its FMCG arm has lost about 2500 Cr in the past 10 years!!! Hotels, Agri-business and Paper & Paperboards business together garnered about Rs 460 Cr while Cigarettes alone fetched Rs 1145 Cr of profits for the quarter ended June'12.


The company’s portal says that it has been cutting down its losses from its Non-Tobacco business and its somewhere in the range of Rs 200 Cr. For the quarter. Adding the above mentioned non-tobacco business profits which are mentioned on its portal, we see that the total loss through its FMCG business (excluding Cigarettes) is of the order of Rs 660 Cr - A huge sum for such a conglomerate which has been in the FMCG business for the past 10 years. The loss must be a little less because it includes the losses incurred due to some other businesses from ITC stables which are not properly mentioned in its financial statements for example its IT arm: ITC infotech which is said to be among the top in its category!


With renewed pressure on its Cigarettes business, what will ITC do now? Put more impetus on its soap and biscuits (Read FMCG-non tobacco) business which is accumulating losses? Most  likely. Because even though the demands for cigarettes among the smokers is pretty inelastic (i.e. does not change much with the change in its price), the ever increasing cost is discouraging new customers to join the death-bandwagon! It was clearly evident in its current results where the volume growth saw a meager 1.3% increase.
If the present trend continues, we are going to witness a plethora of consolidation,/takeovers in such businesses as the lesser peers will find it hard to survive. ITC itself has to turnaround its non-tobacco  businesses in a big way if it wants to protect it's around 6% weightage in the exchanges.

Nifty Review : Inflation data boosts the rally!

So the monthly inflation figure finally fell below psychological level of 7% (6.87% to be precise) for the month of July. As the data were released, the sleeping beast suddenly started to move ferociously. Within the next 5 minutes Sensex moved by around 100 points to 17718 levels as the fall in the WPI inflation came as a surprise to the market which was expecting it to be around 7.25%.

The day ended with both the exchanges remaining strong through out after that. Another positive  came in the form of Germany and France's GDP data. Germany managed to grow by 0.25% while France's GDP was almost flat. It was expected that they might post negative GDP data. This boosted the sentiments and thus was the rally.

Nifty shut shop at 5380.35 - pretty close to its day high. It is approaching a strong resistance point of 5400 and with some positive news coming around finally, it is most likely to break the barrier and trade higher.

Lets have a look at the EOD chart of CNX Nifty:

In the chart we can see the strength and the bullishness that Nifty has been showing since the low of 5043 it hit on 26th July 2012. The rally has been fueled mostly by the increased liquidity that has come into the system after the last monetary policy review by RBI in which it cut the SLR by 1% to 23%. This released 60000 Cr in the system. Hence, at the back of the favorable backdrop that is evident, the nifty has been heading higher. Now, today it managed to break its previous resistance of 5351 and has closed at 5380. In all likelihood, this uptrend will continue before it faces strong resistance around 5450 levels.

However, a look at the Food and Fuel inflation shows these data:
Fuel Group Inflation At 5.98% Vs 10.27% (MoM)
Food Articles Inflation At 10.06% Vs 10.81% (MoM))

The sharp decline in the Fuel Inflation seems more like an aberration. This might be corrected during the next month inflation number as has been the trend for quite some time. Moreover, the sudden jump of the Brent crude to $113-114 a barrel over the Iran situation will certainly be reflected in the next month's data.
Government has finally accepted drought situations in some states including Rajasthan which will certainly push the food inflation higher. Thus the present data of a fallen inflation may not sustain in the coming months.

But the market is in a juvenile state at present and might continue to do so till it faces the technical resistances. Till then traders are advised to hold on to their long positions and should take positions in metals, auto and bankex.
However, in these sectors too, being stock specific will certainly be worthwhile.

Happy Investing!