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! :)