July 31, 2016

Bank Nifty - Interesting Observation

From a high of 20,900+ levels Nifty Bank fell to lows of 13,500 levels over one year and since then it has recovered most of the losses. In terms of retracement, it has retraced alomst 78.6% of the fall in half the time it took to fall.

Nifty Bank Weekly Chart

In the above chart which is of a weekly timeframe, you can see that 19000-19300 levels are very crucial on the Banking index for these reasons:

i) It is a critical retracement zone,
ii) It is a resistance zone price-action wise,
iii) There is an inside bar formation near this resistance zone

Now, if the index manages to break above 19,300 and give a closing above that zone then bulls can sigh in relief. If the index breaks below 18,550 on spot levels then we could see a major correction set into banking stocks. This could be a strong trend-reversal indicator; this week will be very interesting in terms of price action and could decide the trend for the coming months.

Also, it is well known that in bear markets the prices take half the time to retrace their losses. The pullbacks are sharper and stronger and the fall is slow and long. Do comment your views and let the trading community know of the same.

Note: Nothing in this article should be treated as an advice to trade. DalalStreetBulls or Raghav Behani do not take any responsibilities for any losses incurred due to taking positions based on the inputs provided in this report. We encourage our readers to do their own due-diligence.

June 01, 2016

Tata Motors: Zooming Ahead?

Tata Motors - Weekly Chart
Tata Motors has given a breakout from a double bottom formation and looks set to head higher to 560 levels and higher. At current levels of 449, it can be added and averaging, if possible, can be done if the stock corrects to 420 levels. This is our "Tekno-Funda" pick and thus we have a look at the fundamental factors too in this report.


  • For the Q4 of FY 15-16, the sales stood at Rs. 80,684.41 crores vs Rs. 72, 256.40 crores in Q3 of FY 15-16 and Rs. 67,777.72 Crores in Q4 of FY 14-15
  • The operating profit margin stood at 14.09% when compared to 12.63% in Q3 and 12.21% in Q4 of last FY
  • Excellent performance based on increase in sales of Jaguar, Land Rover as well as volume growth in medium and heavy commercial segment in domestic markets
  • There has been a decrease in both long term and short term debt in FY 15-16 vs FY 14-15 which means lower finance charges to the company
  • The company trades at a P/E of 10.98 and P/BV of 2.16
  • The company is giving a good ROE of 23%
We believe the company can head higher and see PE expansion. Tata Motors trades significantly lower on the PE scale compared to it's peers in the industry. This is a positional trade intended to be held for a few months only as of now.

Can Messi help improve sales in domestic market?

May 27, 2016

Nifty above 8000 - Time to sell?

Yeh Kaha Aagaye Hum? (Where have we come)

Nifty Spot Weekly Chart
Technically Nifty looks set for an upmove after breaking out from a year long range as shown in the chart. Also, the breakout above 8,000 levels confirms strength in the index. Whats interesting to note is that IT and Pharma have under-performed in this upmove. If these sectors too start moving up, the momentum will get very strong. At the current levels, 8300-8500 also look very much possible.

But what do fundamentals say? Is this rally sustainable? How to construct a portfolio at this point of time?


Historical Nifty EPS
The EPS we have available is standalone. Consolidated EPS is different, so the the PE calculated will also be a standalone PE. The EPS is calculated based on the weightage of every company in the index and their reported standalone earnings in preceding 4 quarters.

We have seen 2 strong growth phases in earnings. The 2003-2007 phase and then 2010-2013 phase. We are seeing a repeat of the 2008-09 phase when earnings growth fell. The last one year, the earnings have failed to grow and are stagnant in 360-370 range. Consider this, in early 2015 they had touched a peak of 393.77! As on 27th May, 2016 it is 359.96 which shows a fall in earnings. This means negative growth rate! When the earnings are not improving, then on what basis is the market going up?

Optimism. Hope that things will improve and earnings will catch up with the market.

PE Ratio:

You can't trade based on PE ratio but it can be used as a barometer to estimate the medium term trend of the market. PE is the Price to Earnings ratio and is calculated by dividing the price by EPS. Nifty's historical average is 18.68 and that is considered as a fair value generally. Let's have a look at the P/E chart.

Historical Nifty PE Chart
At current PE levels of 22.66, Nifty valuation is expensive. If we consider a stagnant/negative growth in earnings then the valuation is VERY EXPENSIVE. We can say that the market is over-priced at this level. So will the market crash?

PE is not a technical or short term forecast ratio. It says what the status is. Yes, market is overpriced and we expect valuations to cool off eventually but the market tends to stay overvalued for a long time as the wave of optimism lasts long. Nifty in the last 24 months has touched PE levels of 24 twice and we can expect the current rally to go till that valuation again. It can go till 24-26-28 and stay here for quite sometime. This means we can expect a short term rally of 30% also! And at these levels the rally is very fast. So shorting the market will be folly.

When the market is showing 20% to 25% growth in earnings, we can say that a PE of 22-24 is discounting 1 year forward earnings. But when the earnings are not growing at all, then the market is hoping for a rise in earnings. Even if earnings start growing, it won't grow at 20% now itself. So the market is wildly optimistic and irrational at the moment. When the market is at such levels, people are so optimistic and scared of losing out on profits that they rule out any negatives.

We have seen PE of 25+ only in the dot-com boom of 2001 and the 2007 bull market peak. Considering that there is nothing that will spark such optimism we feel that the market may head till 24-25 maximum which translates to 9000 at the most. ( PE of 25 multiplied by current EPS of 360).

But does this mean that the entire market is heated?

Is a crash coming?

A correction in the index usually is seen with a correction in the overall market. Suppose we see that Nifty has corrected 15%, is there any sector or stock that goes up significantly in this period? Rarely and in special circumstances only. All good stocks are also beaten down which gives a great opportunity to buy them at lower levels. 

The current P/E of few sectors based on their indices are as follows:
  • Nifty Bank - 23.43
  • Nifty Auto - 35.90
  • Nifty Energy - 11.31
  • Nifty Financial Services - 19.48
  • Nifty FMCG - 35.67
  • Nifty IT - 18.97
  • Nifty Metal - 22.33
  • Nifty Pharma - 44.31
As you can all sectors except Energy are trading at really high valuations. However, in every market there are stocks that are fundamentally strong but have under-performed the index and are fairly valued. You have to identify them and have patience as you invest in them. When the market falls, the fall in them is lesser.

How to build portfolio as these levels?

PE Table

The above table shows the returns from Nifty at different PE levels. We are currently in the PE range of 22-24 and investing at these levels has given a NEGATIVE return of -8.4% over 1 year and holding for 3 years you get a meagre 1.35% CAGR. This shows that unless you invest now and hold for 5 years, you won't be getting good returns. This is applicable to equities and equity funds also. So it is better to shift money from equities to other assets. If not completely, then a very less portion of your portfolio should have exposure to equity. The BETA of your portfolio should be as close to zero as possible.


DalalStreetBulls clients get proper portfolio allocation guidance help apart from long term stock picks. We are soon coming out with reports on safe assets to park your funds for 6 months to 1 year when market is at HIGH ALERT zone. To know subscribe or know more about our services click here.

Remember: When the market is going up, a crash looks impossible and our brain is so dipped in optimism that we just can't think of 15% to 20% lower levels. But history is evidence that post high PE levels, the markets have corrected significantly.

May 06, 2016

Nifty View For The Coming Week

Nifty Spot - Daily Chart

Nifty has broken the rising trendline which indicates an end to the rally which started from March. A correction either time-wise or price-wise can be seen now. Nifty from the last 3 sessions has traded between 7675-7775 range. Buying can be seen at 7700 levels and selling can be seen at 7775 levels.

For the coming week, if the index breaks above 7775 then we can see an upmove towards 7850-7870 levels. Above this is a very tough zone for the index. 7900-8000 is a very crucial zone on the index and a breakout from this range will step up a new trend in the medium term.

If the index, however, breaks below 7675 then we can see a correction till 7500 eventually. In our last post we had mentioned that a break below 7780 can show 7580 levels and we maintain this view. Overall, we are neutral to bearish on the index for the short term.

Our view on Nifty for May Series can be read here.

Our investment advisory services are outperforming the Nifty index by 12.59% annualized. To know more click here.

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