Dismal results of BHEL - pointer to bleak outlook for the economy

BHEL's results for Q1 14 turned out to be most disappointing . It reported substantially lower topline and bottomline numbers.Margins have also shrunk. Net sales/income from operations down 24% compared to same period previous year. Net Profit down 49% for the same periods. Corresponding to the preceding quarter the figures are more troublesome - 66% down on sales and a staggering 86% down on NP. But assuming that the first quarter numbers are normally not good and  fourth quarter last year was exceptionally good, that still doesn't give any hope.. BHEL's  full year EPS (earning per share) for the previous year was 27%. If  1st quarter  EPS of 1.9 in this year is anualised it gives a figure of roughly 8. Even if subsequent quarter earnings are on the higher side it is very unlikely that FY 12-13 earnings will be matched this year, leave aside registering a growth. If performance continues to remain subdued throughout the year i.e 13-14, FY 14-15 would appear to be clouded. Reflecting the sentiment share,  price of the company has taken a nose dive. Govt. has consequently shelved off the plans for stake sell in the company.

Most capital goods manufacturing companies have been experiencing a downturn for sometime. Performance of this sector is a good pointer to the economy and therefore an underperforming capital goods sector is no good news for the economy.  As it is, infrasector companies are already in doldrums. So is the  auto sector. Together these constitute the major drivers of growth. Brokerages and other reports are already mentioning a downsizing of growth forecasts. Many are of the opinion that Re weakness is here to stay for sometime.  It appears decelaration  seems to be picking up. And in such a scenario we may be staring into a 3.5-4% growth, which is close to our pet growth levels. Stock markets are therefore in a downward spiral.

Disclosure : Sold off entire holding in BHEL  Stock price is expected to reach 2 digits level. Will review buying for long term  when it does.

Till my next

Happy investing

Basudev    

Stimulus stays for the time being

Bernanke said last night that the US Central Bank will continue to pursue an accommodative monetary policy. Translated, it simply means bond purchases will continue so as to continue injecting  liquidity into the economy. As a consequence our markets opened with a gap and posted hefty gains for the day. Bernanke further made it clear that he is not impressd with the present unemployment rate of 7.6% and that he would much rather like to see it at 6.5% for any interest rate action. He said he is somewhat optimistic  But given his position, that's what he has to be. In my previous posts I wrote about the continuation of the stimulus and I stand comlpetely vindicated.on this.

At home our Governor said he is not sure when the Re - USD will  stabilise. Translated, it means the slide is expected to continue. Is the worst  nightrmare ahead of us ?. Further, he is concerned with the Current Account Deficit. Another dampener is our Finance Minister going to US to promote  FDI by US in India.. He has all the reason to do so because India's foreign exchange reserve is fast depleting.

In this situation I think nothing much should be read into today's  gains.. The breadth hasn't been particularly encouraging. At any rate, we are back in result season and as always focus has to be on performance.

Disclosure: I have sold part of my holding in Glenmark Pharma..

Until my next then

Happy investing

Basudev

  

India has to repay $172 billion debt by March 2014 - The Hindu

India has to repay $172 billion debt by March 2014 - The Hindu

Crutches for the economy

Between yesterday and today, not only our markets but also global markets collapsed.  So what has happened that caused such a crash? What caused the panic is nothing short of being silly. Following Bernanke's speech last night it suddenly looked like the collective wisdom of the market- which is what determines stock prices- metamorphed into one of a 5 yr old. How so? Oh ! the stimulus will end Its going to be very very bad indeed , worse than ever before. And so sell whatever you have and run .

Question is did we expect that the stimulus is going to be a perpetual affair. Did we expect that money will be flowing into stock markets perpetually and as a corollary we will have good times till eternity. And yet US markets saw a dream run to reach newer and newer highs recently.

But more probable is that markets had run up too high and had to correct. Last night's announcement was just the excuse. Bernake's message was clear. it was that , if the economy improves the stimulus goes, albeit gradually. Following the withdrawal of the stimulus and with a gap in between, raise interest rates. Further, depending upon the situation the stimulus will be increased or reduced. So all one has to do is to keep watching the economy instead of trying to conjecture on when will the stimulus be withdrawn etc and make all sorts of assumptions.    

But what could lie underneath is that most marketmen are in utter desperation. The desperate need to scalp returns. We now hear of  high frequency trades with all that algorithms in it. Asset clases are rotated . So are allocations to different geographies. And why so? For, deep inside is that lurking fear that "all is not well". It is not difficult to see that.. Take for instance one single parameter. Unemployment. Fed assumes a figure of  around 7-7.5% by the the stimulus is withdrawn  say sometime around Q3/Q4 14. Now, it has to be seen to what extent jobs are brought back. Ground reality appears to be not so very hopeful. Poverty is on the rise. Rising poverty doesn't indicate a falling unemployment scenario. Inflation just doesn't seem to budge. It has to rise to indicate any rise in demand.So things could get worse.  Upwards of 8% unemployment will start ringing alarm bells  Imagine with all that stimulus so far, inflation is where it is. It is entirely possible for it to go sub zero, not to say that it will,  but it is possible.. And that is negative inflation. And in such a scenario it is difficult to see how Fed will be able to do away with with the stimulus.

And in case growth picks up with the economic cycle picking up, that should be cause for cheer and is a vastly desirable situation  After all, anyone who has broken a leg  would want his leg to heal so that he can throw away his crutches. Thats what the stimulus is - crutches for the broaken legs of the economy. It is only necessary till the economy is on its own.

Mean while good quality stocks are approaching  mouthwatering levels.  Investors can start accumulating these stocks. Stocks mentioned in this blog are all at more attractive levels with no significant deterioration in their fundamentals. And with uptick in the environment, are expected to give good returns.    

Until my next then,

Happy investing

Basudev

P.S. There has been a lapse of a day between commencing and publishing this post. So there is inaccuracy in respect of the date of the Fed's announcement. This has been retained deliberately to maintain the spirit of writing.

No respite from rupee trouble

For those who were expecting some steps by Govt to stem the fall of the rupee,  Mr Chidambaram's  press conference on Thursday came as a thorough disappointment. Mr Chidambaram in his usual suave manner explained away the rupees's fall as due the current account deficit  and that many countries with CAD have suffered currency depriciation. And that as and when the deficit is controlled rupee will recover. Further he also expressed his confidence in controlling the CAD.so as to keep it within target. So any hope of an immediate govt action to recover the rupee is dashed. and we may have to continue with a week rupee for some time. Both the sensex and the nifty, as a result, lost over a percent each.

But there were few positive takeaways. He assured that all planned expenditure will be made and urged departments to go ahead and spend. This will result in some economic activity. He assured of  more reforms and suggested that investors should focus on long term rather than get weary on short term volatility. Considering his track record in his present tenure, it appears he means business.  

But what about growth ?   Does it mean that in the long term growth will pick up. May be it will or may be it will not. In today's world, how long is long term.? Growth is the feedstock of stock markets. Stock prices will not go up unless the company grows it's business. At present one big obstacle in the way of companies to grow is the high interest rate environment. Companies  after companies are bleeding. The number of companies whose share price has fallen below par value is increasing.  It is unfortunate that the few instances in which RBI has reduced rates, the same has not been passed on by the banks. And our banks continue with fat NIMs (net interest margins). Its a serious dichotomy here. If the target of credit is bleeding can the banks add flab? As long as this imbalance continues we will be alternating between hope and despair. That is volatility. And it kills.

Until my next then,

Happy investing

Basudev


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Fitch returns India's rating back to 'stable' from 'Negative'

The dramatic fall of the rupee in the past few days appears to have taken a respite and closed higher today at around 57.8  to the $ against yesterday's close at 58.4 and an intraday low of 58.98 (an all time low ). This is due to an unexpected upgrade of India's rating by International rating agency Fitch. India's rating is now back to 'Stable' from 'Negative'. Govt should now be able to breathy easy and continue with its efforts to
contain deficit, inflation etc,  push for reforms, attract foreign investment, improve infrastructure.and put in place necessary catalyst  for.growth. The present upgrade is the result of Govt's actions in the light of Fitch's earlier warning that it would downgrade India unless the country addresses its economic issues. Therefore if the necessary follow through on Govt's action does not take place , we may see a downgrade to junk. And if  Standard&Poor's outlook on India is anything to go by, it still maintains a negative rating. Doubts therefore persist. Govt therefore cannot afford any lackadaisical approach and  needs to cash in quickly on the improved sentiment. It has nothing to loose but everything to gain with elections due next year.

So far as the rupee is concerned, while currencies of emerging markets have also borne the brunt of depreciating values, India might have underperformed a bit. But this could be because  it had appreciated quickly earlier. Looks like we may have formed a bottom for now.

IIP  figures for April released today continues to paint a weak picture for the economy. 2% growth compared to last year. Capital goods index a dismal 1%. Not a happy situation.

Not surprisingly FIIs have been selling. They have been selling index futures, obviously to hedge their investments. They have been selling in the debt market.They  have been selling stocks also. Markets are therefore at the level where it should be under the circumstances. With a depreciated rupee marketmen are not hopeful of a rate cut soon. And with that hopes of highly leveraged mid sized companies getting a hold are also gone for the time being. This is further aggravated with inflation not being kind either.  In any case there isn't much downside left  and we may be near a bottom..   .

More in my next and until then

Happy investing

Basudev
          

Knockout blow for the markets

Coming on the heels of L&T's results, markets wednesday had to grapple with plenty of adverse news resulting in the benchmark indices tanking by 2%.. First about the killer. Nikkei started plunging and ended the day with loss of 7.3%. Then there were the results of heavyweights like BHEL, SBI and Tata Steel.

BHEL's results in my opinion was heartening. Though there has been a decrease in NP yoy of about 5.5% , qoq NP has seen a whopping increase from 1182 cr to 3237 cr. which is 2.7 times. Likewise EPS has also seen a phenomenal jump compared to the previous 3 quarters. Now why does this sound so nice. BHEL's price has been going down in relation to the numbers posted  by the company. This quarter's jump in NP should come as a surprise and the stock should see some  rerating.  The company has declared a final dividend of 164% for a total dividend of 270%. The company has been able to add morethan 5000 cr to ita reserves during the fiscal, boasting a reserve of more than 30000 cr. The only problem being faced by the company is on account of the receivables from the State Electricity Boards.. As and when the investment cycle picks up BHEL will give a very good investment return.

So far as Tata Steel is concerned it will continue to be bogged down by it's European operations affecting its consolidated numbers. Present numbers are dismal indeed, wherein it has taken a hit of around 7400 cr as "exceptional item". Subsequent quarter numbers should be more realistic. The company has declared a dividend of 80% demonstrating Managements faith in the company's strength. Technically daily charts show a falling wedge, which is a bullish pattern. Breakout point is around 310/312.

What has happened with the Nikkei today has to be viewed seriously and not just a circuit breaker giving way. Is it likely to affect the US markets ? I will follow up on these in subsequent posts.

Until my next

Happy investing

Basudev

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L&T share price tanks

Markets today didn't like L&T's  numbers the share price saw a fall of nearly 6%. It is likely to fall further. As it is, the stock had seen an almost  26% rise in about 1 1/2 months time and was getting unstable at the top for sometime.

So far as the results are concerned, there has been some margin compression  and also an increase in interest outgo. But the EPS YOY shows an increase of roughly 9.5%, from 76.1 to 84.1, which is heartening. It is to be kept in mind that the business of the company has to be seen in a slightly longer time frame as against an auto company for instance for which quarterly or even monthly figures  can easily show the trend. All in all for an investor there is nothing to be worried about. Besides, the company has increased its dividend payout.and more importantly has announced a bonus issue  of 1 share for every 2 held. A bonus issue points to the company's strength in terms of servicing the debt. As  I mentioned the stock price had gone up very much prior to the results. It will now see some correction. At some point it will be a very good investment opportunity for investors to get in..In a previous post I had disclosed that I sold off my entire holding in L&T. So I stand vindicated on my stand. I now intend to enter again after some more correction.

There was some nervousness recently on what Bernanke,s testimony on monetary policy is going to be like.. Whether  Bernanke will start reducing the stimulus.or not. Markets shed some gains and were pausing. But at the time of  writing this post it is learnt that Bernanke has hinted at not cutting on  the fiscal stimulus. American markets may therefore continue in it's  streak of creating records. More on that in following posts.

Until my next then,

Happy investing.

Basudev

Current account deficit comes in to haunt again

Trade data released today shows a deficit of  $17.8 bn as compared to $14 bn  last year. That is a 27% escalation. A major contritbutor has been a whopping 138% increase in Gold and Silver imports during the period. Imports at this rate will undoubtedly jeopardize Govt's attempts to contain Current Account Deficit. Any failure in that front is fraught with risks to the economy.

But it is abundantly clear that there is a rush to own physical gold. This doesn't augur well for the economy. Ironically the sudden  and massive drop in gold prices - which should be indicating a lowering of demand -has actually spurred a frantic rush for owning gold. As it appears, its a worldwide phenomenon with China also importing significantly. This has its own complications,  in the sense that it creates certain imbalances by way of quantity of gold that banks have with them at any point of time. Gold prices will then be subjected to unprecedented volatility. A comfortable reserve always makes any Govt breathe easy on its external liabilities. For India volatile gold prices could play havoc with its currency. The rest follows.

The rush for gold at least indicates a shift away  from equities to that extent. No wonder the trade deficit numbers caused the benchmark indices to record the largest single day fall in 14 months. If the correction continues it might be time to accumulate quality stocks once again.

Until my next

Happy investing

Basudev

Soaring indices - Caution required

Sensex and the Nifty are above their psychological levels of 20000 and 6000. Foreign flows have been the driver of this rise. Our markets also have  been buoyed by continued rise in major global indices particulary that of the US markets. US markets are at record high.

As I have been maintaining, economic fundamentals in the US doesn't seem to be supporting stock market performance. Many doubt whether US is out of the woods. Unemployment data though encouraging on the face of it, leaves plenty of room for doubts on recovery .Many analysts are not happy comparing the extent of recovery this time with recovery rate in  previous recessions. Improved housing data appears to be investment driven rather than homeless American buying houses. Their numbers seems to be on the rise  as is the increase in the population on food stamp.

Leave aside the other  criteria such as Govt debt, budget deficit, trade deficit etc.. Doubts can be cast on the ability of the American Banks to withstand future stress, as leverage of the banks continues to be high .The culprit, as in 2008,  is the Derivative Exposure. Any disaster, if it happens, it will be over to 2008 and worse..With all that money the Fed is putting into the system,  inflation doesn't seem to be getting past 1%. A higher number would be desirable for recovery.

Besides there are reasons to believe the crisis in Europe is deeper  than what meets the eye. Its impact will also be felt in US and all over the globe. A contagion on a global scale. But in the meantime Dow can still continue to go up.

On the domestic front UPA is in real crisis, what with minister after minister resigning on gounds of corruption, graft etc. PM Manmohan Singh is under increased attack as the opposition doesn't seem to be relenting. With Supreme Court keeping up its reputation, it will be tough time for Mr Manmohan Singh to convince people that he is capable of delivering good governance. It will mean a declared innings and over to Election Commission.

IIP (index of industrial production) data shows an improvement in Apr. Capital goods index is showing a different story as also falling car sales data. These will have to look up for any joy.

In such a scenario it is necessary to be extremely cautious and not chase prices prices  as there could be double whammy in store. Liquidity flow could dry up and there can be early elections. Indices are 5% away from Double Top. Any break past a double top normally results in a strong upmove from thereon. That doesn't seem likely now.

Until my next then

Happy investing

Basudev

Bricks & bouquet and FII flows

Results so far has been a mixed bag. Overly leveraged companies continue to struggle to keep afloat. Tech stocks barring a few, took a beating post results. Midsize infrastructure companies in addition to their debt woes are also having to cope with lack of worthwhile investment in the sector. Autos have their own woes in a high inflation low growth scenario. Banking sector has done well, again barring a few which have not been aggressive enough.. Consumption story has given a real surprise this time. Most FMCG companies have posted decent enough results.

So, nonperformance has been punished by market while companies that met or exceeded  expectations have seen their stocks soar. This is normally the case and it should be  possible to take a call from here. But things don't seem to be easy this time around.. Indices have made a vertical run in the month of April.. Sensex rose by 8.6% while Nifty logged 9%. Technical charts are now stretching in the overbought territory. Dow and the S&P 500 have had a big run so far reaching all time highs. Can we remain behind? Looks like FIIs are in again.

There is reason too for the FII inflows. Anytime there is gush of liquidity in the US, it finds deployment in markets  around the globe and we too get our share of allocation. Also it appears Benanke is in no mood to let  go any time soon. He is determined to inject liquidity till American economy is truly out of the woods. But whether he will succeed is another matter. There are many who feel American economy will not recover any time soon and the present euphoria is a bubble waiting to bust. About this, I will write in a subsequent post..

So what is to be done now. As I mentioned earlier markets are overstretching. Inflation will take its own time to climb down. Particularly the food inflation. Banks have not and are in no mood to reduce interest rates , though RBI has reduced rates on several occassions. More so they want a further CRR cut, meaning more cash in the coffers.

In such a scenario it is a tall order for markets to gain further traction. Though Bulls will try to replicate Dow and S&P - lifetime highs for Sensex and Nifty  i.e.. May be FII flows could help them. And the flip side is that any deepening of the political uncertainty will dash all hopes of the bulls.

Best is to book profits and earn bank interest till markets correct. I have sold L&T lock stock and barrel..

More in my next including stock ideas.

Until then.  Happy investing.

Basudev



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Quarterly numbers to give direction

Its earning season now. All sorts of numbers QonQ,  YonY etc will be out in comings days/weeks. Markets are hoping to get some impetus from these to give the markets the direction it needs. Which means marketmen are waiting to see if the markets are going to go up or down from here. It will  therefore be necessary  to carefully examine these before any further action in the markets.

BHEL  today announced flash (tentative) results for YE 31 Mar 2013.  YOY ,while there is an insignificant drop in profits (.08%) the order inflow increase is a stupendeous 42.7%. On the receivables form customers front, situation as stated by management is comfortable indicating not much of a  problem with cash flow.

Stock Idea:  BHEL: As mentioned above we can hold an optimistic view on the company  At its current price of Rs. 182, P/E  works out to a paltry 6.9. Also to be considered is the fact that the company has recently received a "Maharatna" status from Govt. Such status gives the company far greater autonomy. It appears that invetment cycle will bottom out sooner than later. With that the power sector is bound to get the required boost . And BHEL's stock, which has been battered, will widely outperform. For patient investors it is a very attractive buy at current levels. Technically it has broaken a very important support level of 200. There is no support till 150. The stock might not reach there but it is possible in case there is any sell off owing to any adverse scenario globally or locally.

Stock Idea update:  ICICI Bank . I had mentioned that  this stock could be bought around Rs 1000 levels and lower.. It sure corrected to this level. Looks like there is more weakness and it could get more attractive.
RECL is showing strength.

Disclosure: I hold BHEL and RECL. Waiting to enter ICICI Bank

Till my next then

Happy Investing
Basudev          

Markets continue to stagnate

Listless condition in the markets is expected to continue. After a few days of rally indices today took a tumble giving rise to a spectre of continuing volatility. Uncertainties facing the markets are quiet a few.

Interest rates are not likely to come down soon. With monthly increases in diesel prices, inflation will continue to exert pressure against any monetary easing. Companies will therefore be facing an uphill task
protecting bottomlines. There are also political uncertainties. Noises keep coming of early election etc.

Technically frontline indices are in a downtrend making lower tops and lower bottoms. Also Sensex had left previous upward gap @1800 and 1750. These will have to be filled up. So 1800-1750 are possible targets. Same is the case with Bankex. It will have to fill up gaps @ 12250/11750/11400. Most of the important stocks have broaken below their major trendline supports. Further correction is lurking. One should therefore be not in a hurry to buy now.

Stock Ideas:
ICICI Bank - This stock is expected to fill up an earlier gap @975/900 on the daily charts. Will buy if the stock corrects to around these levels.
RECL - This stock is,for a change, is in an upward channel on the weekly charts with lower line support  at around 180. Will buy at this level.

Fundamentally both the stocks have a good track record.

Until my next then

Happy investing.

Markets continue to bleed

First the `Cyprus issue and then DMK,s pull out from UPA II.. Cyprus's bail out all of  a sudden  amidst the spectacle of the American markets reaching all time highs served a grim reminder that there could be more ugly surprises.on the European front. We are once again in risk off mode. Cyprus Govt's decision to tax bank depositors has not been taken well. and will generate lot of resentment if retail depositors are not let off the hook.
At any rate its impact will only be limited considering the size and profile of the country.

At home finally DMK has done what it intended to do, i.e.withdraw from UPA. From its recent posturing it never appeared that it  was comfortable supporting UPA.  Looks like at the moment the numbers for UPA are comfortable enough to ensure full term till 2014..

The utter panic in markets today should clear soon and situation should get normal.

However severe damage has been suffered by midcaps. All those glorious midcaps are at abysmal levels and   it is not uncommon to see a midcap stock at a tenth of it's peak levels in 2008. For midcaps the clock has turned a full decade back. This is far greater  damage than one could imagine. It will take a very very long time for interest to return to these.

But of course FII inflow could change all that. And vice versa any outflow would give us the horrors we will remember for a long time.

In line with  what I mentioned in my previous post, I sold  IVRCL and  Reuka Sugar to cut my losses.

Till my next
Happy investing

Midcap mayhem - time to cherrypick ?

For those diehards in the stock market, the recent carnage in midcap stocks has once again dealt a body blow..The extreme volatility has left may confused and even wondering whether to invest in other assets such as gold or real estate. While gold and real estate has its own place when it comes to investing, for diehards like me its the stock markets . Investing in stock markets has many advantages e.g. ease of bye/sell, tax benefit in the long term etc. The important thing is one has to be careful in selecting stocks. And the mantra now is good transparent managements with proven track record. These companies will be able to weather the tough times best.

Tough times have been with us for quite sometime now and looks like its getting tougher . First the rate increases by the RBI. This lowered the the profits of companies and even turned them into loss making ones, because of increase in interest costs.  Then inflation continues to remain high.  Growth rate has fallen to almost half. Unemployment increases, demand falls and a vicious circle starts. The perfect concoction for "stagflation"  - which is a situation where growth falls,  inflation remains high and unemployment rises.  

C Rangarajan  chairman of  PM's economic advisory council and former RBI governor has said that economy is facing stagflation.

It is to be seen what steps Govt takes to get back into the growth path. Until then one can defer any further investment and let the money earn FD interest.  For stocks in the portfolio, its time to get rid of junk companies and wait for puting into only the bluest of the blue chips. About these I will be updating in my following posts.

Until then
Happy investing