FxCurve

18/05/12

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The short term over hang on the markets definitely persist and is unlikely to be resolved soon. Band-aid measures like we have seen from global central bankers or Indian government cannot stop the underlying rot. The question however is, how rotten can it get before we see good days? We believe the technical picture of the broader markets makes for much more bullish case than the fundamental picture. Nifty PE Niftys PE currently is a shade below 17, while the past ten year average is close to 18.3. The longer term averages of the Indian markets are close to 12-13. Interestingly, the only two periods when markets remained below 18PE was during the two downturns 2001-03 and 2008-09.

PE is a privilege markets get for growth and stability of earnings. Much of the outlier growth of India has been eroded thus eroding the premium India could charge for 8% plus growth. The growth rates of 6-7% are no way great and India will have to compete for capital with slew of emerging countries with above 5% growth.

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Indian macro indicators really look bad. Just sick, too sick if no remedies are made soon.

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Technical Analysis

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The best explanation we have of the December-February rally is to label it as X. Though opens a possibility of corrections and further downtrends, the alternative is that the present rallycorrection is laying a base for a larger move to the upside. The downtrend however, considering the fundamentals and valuation, may not be as sharp as seen in 2008-09. In short term the prices have reached a 78% retracement at 4770 of the Dec-Feb rally. If the prices hold these 78% retracements, possible moves opens to 5300 and 5450.

The best clue for the bullishness in Nifty however comes from the Bank Nifty. Bank nifty topped in February exactly at the 61% retracement of the entire fall and has now corrected to almost exactly the 61% of the Dec-Feb rally. If this retracement level around 9000 holds, then we are likely to see a possible retest of the Feb highs again. The first possible target is the 50% retracement coinciding with the falling gap at 10100, giving a projection of 8% returns from current levels. The next target would be 10350s, which is the 61back and the capitulation region on the present fall.

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Bank Nifty and CNX 500 also currently holding above its 61-back which is a bullish sign.

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STOCKS & SECTORS SUGARS

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We see huge upsides in sugar stocks. The sector has been badly beaten down over past 6years! The stocks have corrected for past 6 years with intermittent rallies. Some of the quality stocks in the sector have beaten down 80-90% of value from its peak. In our opinion, sugar stocks give us some deep value. Stocks like Balrampur Chini, Shree Renuka Sugars, Bajaj Hindustan, EID Parry etc offer some excellent long term upsides. Stocks are so beaten down and so off the radar that any good profit making company with good managements can be bought at these levels. The first signs of accumulation is already seen in several stocks (below chart). The move up would probably be few months to a year in coming (if not more). The sector would be a good buy going ahead. Below are the charts of Bajaj Hindustan which are representative of the charts across the sector. Bajaj Hindustan (26.90)

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HEDGFX

Our prime picks in the sector are Balrampur Chini, Shree Renuka, Bannari Amman and Bajaj Hindustan. The general idea is: when the whole sector is going at deep discounts pick the best of the lot.

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Videocon Industries (174.40)

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The white goods to petroleum to telecom player has consolidated rather well. It peaked in late 2007 and early 2008 and since then has consolidated mostly in the range of 250-170. The present consolidation is exactly at the 61% retracement of the Early 2009 bottom to October 2010 top. The present chart formation seems to be little like falling-wedge which syncs well with the long term wave counts for Videocon. For the interim short-term trades the stops are close below 165s. For a long term investments a wider stop would be preferable.

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Sanghvi Movers (100.40)

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Sanghvi movers had cash EPS of Rs41.4, and are currently quoting at PE of less than 5. One of the largest crane companies in India with good profitability, dividend track record and Net Profit Margin of more than 23%. The Long term trend currently holds above the trend-line originating from its initial impulse move.

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NMDC Ltd (175.90)

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NMDC appears to have completed its three way correction from its 2007 top, with a sharp b wave. This would indicate the next wave of impulse would be equally sharp. The prices on shorter term has also completed a 5+3 wave move indicating the correction may truly be over. The prices are however highly dependent on the commodity and resource prices and may be highly influenced by it in short terms. On a longer term however, the fundamental currency debasements and technical outlook is likely to work in its favor. The 38% retracements of the present fall coincide with the resistances at 300s, and this is our first target.

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Escorts (65.40)

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At Rs690Cr this is probably one of the cheapest auto stocks available. Escorts is currently trading at its long-term multi-decade support levels. In short term, the stock is possibly in the making of a triple bottom. For short term tactical/ trading purposes we would like to wait and watch for confirmation at these levels. For long term we can buy the stocks at current levels.

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Max India (194.95)

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Its hard to believe the company which has its fingers on several successful ventures of last decade has been consolidating for better part of last decade. Given the good management and its successes in past we can expect a good breakout in future. We would not hazard a guess on the likely targets of this but it should be quite lucrative.

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