January 26, 2015

Nifty and Bank Nifty Futures - 27th January, 2015 trade setup

Nifty Futures - 4 Hour chart
Nifty is in a very strong uptrend and thus we will be looking for buying opportunities only in the index futures. Buy above 8880, SL: 8830, Tgt will be 8960+ levels.

Bank Nifty Futures - 4 Hour chart
Bank Nifty future is a BUY above 20185 with a SL of 20085 and TGT of 20385. As the trend is very bullish and new highs being made, we shall look for BUY opportunities only.

All these trading techniques and their implementation are part of our technical analysis course which is free for those who open their brokerage account through us.

January 20, 2015

Nifty PE above 22 - Nifty Valuations

On 20th January, 2015 Nifty closed at historical highs of 8695.6 and a P/E of 22.16. Generally a P/E of above 22 is considered as overbought zone by many and they start all doomsday predictions. In this article, we shall try to understand the valuations and what they say about the current rally. EPS, P/E of Nifty will be used to understand the valuations.

EPS - Earnings per Share
P/E - Price to Earning ratio

PE Valuations:

Below 12 - Extremely undervalued
12 to 17 - Undervalued
17-19 - Average historical valuation
19 to 22 - High expectation of growth
22 to 28 - Overvaluation

Rallies in market are either judged on rising EPS or P/E expansion. When P/E is expanding it means that the investor's sentiments are getting more bullish and the expectations are of faster pace of growth than what it is currently. What is this rally backed on?

EPS Chart - Click to enlarge
P/E Chart - Click to Enlarge

Sentiments - Click to enlarge

The above charts and tables show various phases of EPS and P/E. As seen whenever the P/E goes above 22 levels and EPS growth is below 15% the market does correct in valuations. Also, once the market starts trading above a P/E of 20, it tends to hold those levels for around 1.5 years usually. So in the current bull market scenario, 7800 levels on Nifty appears to be an investing zone. Also, P/E valuations have usually corrected from 22-23 levels to 20 levels. However whenever the index has traded above these valuations we have seen very sharp rallies. It is usually at these levels (22+) that the retail investors enter the market for "long term". Historically the index has seen 28 P/E twice. If it were to go to 28 P/E this time too, we could see Nifty head to 11,200 atleast! Reasons why P/E is expanding, investor growth assumptions increasing:

i) Crude Oil prices are falling
ii) Inflation has started cooling down
iii) RBI's rate cut cycle has started
iv) Strong stable government is now running the nation

For earnings to pick up and go above 15% growth rate it will still take atleast 1 year and even that is something not sure. Till that happens we can expect Nifty to sustain above 20 P/E valuations. What will be interesting to see is will Nifty touch 25 or 28 P/E. If it does touch by then, how much will EPS grow? Average P/E of Nifty is around 18.42 and currently Nifty is around 8700 levels. So investors are expecting an EPS of 475 levels in a year which means an expected growth of  17.3% however, the current growth is around 11%. Will EPS growth rise to 17% is anyone's guess.

What to do now?
Just because Nifty is above P/E of 22 doesn't mean that the market will crash, infact some of the wildest rallies have come at these levels of valuation as optimism of investors crosses all rational thinking. As mentioned above, historical trends could see Nifty touch 11,200-12000 levels also! 7800 level will be a crucial level to watch as the 20 P/E is a buying zone in bull markets. EPS is not growing and P/E is expanding. The market can remain irrational for long as the above table shows, between Jun 2007 to Jan 2008 the P/E rose from 20.5 to 28 and earnings barely grew 9%. If earnings don't show signs of growth in coming quarters, the market could correct significantly by 15% to 20% till 7300-7500 levels. If you are holding stocks with excellent fundamentals then buy on dips; stocks that you are holding for turnaround stories, other bull market stocks should be liquidated at higher levels and sit on cash. This market is ripe for momentum trading.

Our fair valuation on Nifty:
P/E: 19 to 20
EPS for FY 15-16: 450
Jan '16 Nifty: 8650 to 9000

It is very risky to take BUY/SELL decisions based on just P/E. NSE doesn't release the conslidated EPS and thus the consolidated P/E is not known. The consolidated P/E is usually lower. As we said, use this market for momentum trading.

January 19, 2015

Plastiblends India Ltd - A bull market investment

Plastiblends India Ltd is India's largest manufacturer and exporter of colour and additive masterbatches for the plastic processing industry. The company exports to around 40 countries with major presence in the European, African, South American and Asian markets. The company has a production capacity of 75,000 MT per annum.

The masterbatch industry directly benefits from a growing plastic industry. Masterbatch consists of pigments and additives which provide aesthetic looks and functional properties to polymers. The per capital consumption of plastic in India is estimated to be around 8 KG and by 2020 it could go upto 20 KG. It is very low compared to the developed markets and the gulf market. This comes despite the strong awareness to use less plastic. The industry is highly fragmented in India and the organized sector faces stiff competition from the unorganized sector.
The Global Thermoplastic market for 2014 was estimated at 208 million tons. Polyethylene accounted for 38%,
Polypropylene 27% and PVC 19% respectively of the Global Thermoplastic market. Demand for these polymers
(PE, PP & PVC) grew by 2.3% during 2013 driven by North America and China and marginal improvement
in European market. The demand for these polymer products is likely to grow at CAGR of approximately 4%
over the next 5 year period. There will be increasing demand towards packaged products, retail, consumer
durables, Automobiles etc. With growing consumption of polymers, the Masterbatch Industry will be a direct
beneficiary and the outlook is very good for Masterbatch Industry.

The sales have grown at a 5y-CAGR of 22.7% from Rs. 210 Crores in 2010 to Rs. 465 Crores in 2014 and the profits have grown at a 5y-CAGR of 24% from Rs. 10.43 Crores to Rs. 27.24 Crores in the same period. The OPM stands at 10.5% and the NPM stands at around 5.8%. The plastic industry faces low margins due to heavy competition.

The quarterly results show growth on both YoY and QoQ basis for the quarter ended 30th September, 2014.

The equity share capital of the company is Rs. 6.50 crores and reserves stand at Rs. 144.5 crores while debt stands at Rs. 27 Crores as per the filings for quarter ended 30th September, 2014. The company is reducing debt consistently since the past few quarters.

Market Cap - Rs. 319 Crores
CMP: Rs. 245
P/E: 11
DY: 1.7%
ROE: 21%
Face Value: Rs. 5

- No pricing power as industry is highly fragmented
- Low margins; OPM has fallen from 14% to 9% levels in the past few years
- Anti plastic awareness can create pressure on the industry
- High volatility in Crude Oil prices can have negative impact on production costs

- Market leader in the masterbatch segment
- Industry growing at a very good pace; Expected to grow for the next 3-4 years
- Company maintains a healthy dividend payout; Current yield is attractive
- Low crude oil prices can improve margins
- Improving Return on Equity

We are in a healthy bull market and all smallcap and midcap stocks with low P/E and high dividend yields are expected to do well. This is a pure bull market investment with a 2 years view at the most and that is why we have not made any sales forecast (Might hold further if performance shows more improvement). This is one of our "Tekno-Funda" picks which consists of stocks that have seen heavy accumulation and rally in the past few months and are still trading at considerably low valuations. Please invest as per your risk capacity. One can divide the investment into Plastiblends India and Poddar Pigments.

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