Friday, June 16, 2017

IPL Bidding 2018-2022 "The Winner's Curse"

Well let us take a break from Nifty and the negativity around jobs. It is the cricket season and an exciting time as we are going to have bidding for the broadcasting rights for IPL 2018 to 2022.

The last time bidding was done was in 2008 when mysteriously, the lone player in the foray was Sony. Star India's bid got rejected as their bid was conditional and BCCI wanted a non-conditional bid. Well whatever happened, we know that Sony paid USD 900 million for exclusive television rights for a period of 10 years. Without taking into account inflation and exchange rate fluctuations etc, that was a bid of 5000 crores for a period of 10 years. The estimated revenue that Sony got for IPL 2017 is pegged between 1100 crores and 1300 crores. We also know that the previous investment was recovered within 3 years.

Now that the new tendering process has started, bids have been invited by the BCCI. There are about 16 to 18 players in the foray. Obviously the television channels will all be out there and thanks to the digital era, some of the interesting bidders are companies like Reliance Jio, Facebook, Twitter, Amazon

In this three part article, I will cover the merits/demerits of the bidding structure, SWOT analysis of bidders and revenue streams for bidders. First things first, I want to discuss the merits and demerits of the current bidding structure itself.

We all know that the BCCI believes in hegemony as it wields a lot of power in the places that matter. As compared to the last time that the bidding took place, the BCCI has wisely invited bids from multiple parties and hopefully there will be more transparency. What has shocked me is the minimum reserve price that BCCI has pegged for the broadcasting rights for the next five years.

Considering the scathing review BCCI got from the Lodha panel and considering how little BCCI has given back for development of the game, the current reserve prices are appalling; this is an encore of what happened with the telecom spectrum and telcos. Based on the public information available about the advertisement slots, past collection data, here is my graph of projected earnings for IPL 2018 to 2022

The workings of this graph are in the excel file here

I will be updating information and the workings  behind this graph from time to  time.

As of now, the biggest revenue source is television advertisement slots and it will continue to be for the next five years. Television advertisement inventory is sold as 10 second slots and an average IPL match has about  230 to 250 10 second slots depending on the stage of the game. A lot of hype is going on about the digital space and IPL 2017 showed an average 2 million users on hotstar for each match. Going by Google/Youtube's pay of 1 dollar / 1000 views translates to about 1 rupee per user per match in the digital space. Now that virtual reality devices have come in and soon, we will have the luxury of watching sports in 3D on our smartphones, the revenue per user can notch up much higher with subscriptions but we also need to remember that this is just the beginning. The digital revenues won't be as high as a lot of media pundits are projecting them to be.

With some basic assumptions, my back of the envelope suggests a revenue of about 6,000 crores for IPL2018 to 2022. Taking some more optimistic projections and title sponsors and technological disruptions, 8,000 crores is the best case scenario. Remember that we have an election coming in between and one structural bear market scenario that will play out. There will be a lot of discretionary spending taps closed for at least two seasons. This means that the winner cannot bet on pure advertising revenues. Right now, BCCI is expecting upwards of 16,000 crores and that is not a price worth paying at all. Any price above 8,000 crores for a 5 year contract is going to end up as a proverbial "Winner's Curse" The money will be made with more activities upstream and downstream

In the next two parts of this series, I will discuss the SWOT analysis of major players in the bidding ring for the IPL auction

Friday, June 2, 2017

AI/Robotics/Automation - ITEmployees Cry Foul - Part2

This is part2 of the intended 4 part story with regards to job losses in IT/ITeS segments [which is what the media is talking a lot about], the slowly worsening situation in telecom post Jio [not much is being talked about] and the impending consolidation in PSU banks [almost nobody is talking about]

Today, I came across 2 contrasting opinions. One by the almost revered guru of Indian IT, Narayan Murthy and other by a veteran who got TCS to where it is today, N Chandrashekharan. According to Narayan Murthy, the top managers in IT companies have to take cuts in their paychecks. I agree with this part. He also expects companies to do as much as they can and stem unemployment. This, may I say is a utopian dream. Since the internet dot com bust, so many economists in the developed world have proposed part-time employment options to be taken by employees so that the stress on unemployment allowance is reduced and number of unemployed people goes down.

The challenge with this is that a person who has a job would like to go the whole mile to the extent s/he can in this VUCA environment - make hay when the sun shines. What Chandrashekharan has said is that we are becoming more and more digital and that means there will be more jobs. This is exactly what a lot of experts in hi-tech industries have been saying. There is a lot of demand for skilled labour. The problem that we are facing all over the world is that there is a gross mismatch in what the industry needs and the skills that the available talent pools have. In India this is a bigger problem.

As has been rightly said, re-skilling is the order of the day. If we look at the thousands of people in the IT/ITeS sectors today, there are broadly three categories of people. Highly skilled, highly motivated and people on top of their game - these guys are simply not worried. Most of them land the dream jobs they want even before somebody decides to give them a pink slip or they are confident enough to put themselves in the sweet spot sooner than later rather than compromise with the current employer. The sad part is that this is less than 2% of the workforce. The group of people is very special. Based on current economic trends, they are drawing a good salary, have settled into a good lifestyle but their talent levels are not as high as the new rules of the technology game demand. They were aware about it in the past but when the going was good, these short-comings were ignored. That will not be the case now. The biggest challenge with these people is that they have got so used to certain habits, skillsets and attitudes that it is extremely difficult to change unless these people decide to change themselves. Unfortunately, that segment is almost 40% of the workforce. For those who do decide to eventually change will need more time to get the basics right as compared to the youth who are learning these technologies upfront without any pre-conditions. The last segment is the ones who are currently at lower levels of the organization and are simply following SOPs. I fully believe in dignity of labour and I mean no offence to this segment in my previous segment. The work they do still matter a lot and even the new technologies will need these kind of people albeit in lower proportions.

Just to digress from the topic a bit - let us consider mobile phones - a technology gadget that most people use these days. Once upon a time Motorola was considered to be the best; then came Nokia with its super seller Nokia3310, a handset that was literally a style statement. Almost everybody said that this is the best one can have until BlackBerry came along. Just when almost everyone was convinced that BlackBerry is the ultimate in mobile handsets, Apple came out with the iphone and today the latest model is iphone7 and people are waiting for the 8th version.

The only constant is change. As I mentioned in my previous post as well, today technology will help automate a lot of tasks and improve productivity. However, the industry needs skilled people who will make this technology possible. There is a fantastic movie featuring George Clooney and Anna Kendrick called "Up In The Air" It is a classic case that portrays how and why human resources still make such a difference. And for the experts who keep harping about the ability of AI being superior, it is worth watching Minority Report. The movie very nicely depicts why we cannot be 100% sure about AI

To summarize, technology disruptions will keep on taking place. As long as one has the ability to upgrade and re-skill, one should be fine. Don't be pessimistic - be optimistic as there are so many avenues that are going to open up and the fact is that we have a lot of jobs and opportunities that need people. This is going to be my next article in this series - so stay tuned. Just remember the keyword "Transferable Skills"

Saturday, May 27, 2017

AI/Robotics/Automation - ITEmployees Cry Foul - Part1

Now that I have given my medium term outlook about Nifty, I will be spending the next few posts specifically addressing the sectors that are currently under pressure. There is so much being put out in different forms of media with some common keywords - automation, Artificial Intelligence (AI), Robotics, job losses.

For the common man, Robotics and Automation imply that tasks that can be performed by a machine with minimal human intervention. It is not as if robotics and automation came just yesterday. Automation started right from the time we had the industrial revolution! Two simple examples; imagine what happens when a Godrej storewell cupboard is being made (this is a common example I use in my lectures) We need sheet metal cut into different sizes according to where they will fit in the structure of the cupboard. Once upon a time, the entire cutting process was done by human beings. The challenge was that the productivity levels varied a lot and the quality levels varied a lot. Today we have a machine that cuts the sheet metal. Human intervention is needed to basically tell the machine - cut the sheet metal of this size. Another human intervention is to make sure that the supply of sheet metal is in place and once the cutting is done, take out the cut pieces. Advantage: What perhaps would take 100 human beings 100 hours to produce is now done by 1 machine in less than 10 hours. The variation in quality is extremely limited. Today there are millions of tasks in manufacturing and services where machines can easily replace human beings and perform a lot of tasks with minimal human intervention. Similarly in a financial services environment, a lot of accounts reconciliation can be automatically done by the system at the click of a button.

Anybody who says that automation is bad because we need to keep the jobs is akin to saying don't deploy machines to make the road or for that matter don't give the workers shovels. We need to keep the jobs so let them use spoons and ladles to build that road - lifetime employment. Is that what we really want? Yes I agree that there are some sensitive aspects where even if we have the option of an automation process, we perhaps should not allow automation because of security issues. A common example of this is drones for package deliveries. We know that it is in fact a fantastic innovation that looks great on television. My concern is that what do we do if some idiot misuses the technology and ships a bomb?? Air Traffic Controllers all over the world are already stressed with the tasks of managing airplanes and choppers. Imagine the scene when they have dots all over their screens because of these drones. Unless these security concerns are adequately addressed, perhaps we are better off keeping this innovation in the laboratory.

Artificial Intelligence is exactly what it says - the computer uses some sort of a program to perform analysis. We need to understand a key thing here - the system becomes intelligent only after some human being tells the computer what to look for and how to do the analysis. This is precisely the reason why the IT/ITeS industry in India is negatively impacted and job losses have begun. A lot of work that was earlier done by IT/ITeS employees by people are now being automatically done by the very computers and programs that have been created!

We need to understand one thing very clearly - India has grown significantly because of IT/ITeS companies but India has not contributed significantly to innovation in this very segment. All that India [and in turn the industry and people] has done is worked on the price advantage. Even for the basic computing tasks, if it costs USD 6000 / month in US [Monthly CTC for 1 employee] it costs USD 2000 / month in India. That is the reason why companies started laying off people in countries where salaries are high and gave those jobs to Indians. How many kinds of software innovations have been created by Indians in India? Google, Facebook, Microsoft etc etc etc were not India's contributions. Once that program was released, what Indians did well was fixing bugs and glitches. Now there are superior technologies that don't need so many people to fix these things.

We need to realize that automation is going to happen in many areas of manufacturing and services forever. What is important is that to get these automation techniques working, you need to be extremely smart and talented. The basic problem with a vast majority of Indians is that "smartness" and "talent" are rarely found. Yes thanks to an education legacy that the British left behind, we have a lot of English speaking graduates and post graduates but degrees do not imply "smartness"

So whether we like it or not, automation will continue and an employee is not smart enough to create and manage automation, s/he will eventually lose the job. Another question that then comes up is why do companies don't take initiatives to re-skill people. Human Psychology has shown that the greater the degree to which a person is used to think and do things a particular way, the greater is the challenge to make the person change. The old patterns and attitudes tend to be so deep-rooted that the unlearning process itself is a big challenge. And when you have so many young people joining the workforce - with fertile minds that can be easily trained, companies will take the easier option.

A lot of people complain that they are getting fired because they are not young enough, that is a wrong judgement. People are not getting fired because they are old but because they are not good enough for the new challenges. The people who stayed ahead of the curve and were talented enough are still being rewarded. And let us not forget that when the IT boom started, these very employees grew at the expense of employees elsewhere.

To be continued

Friday, May 26, 2017


Over the next few posts, I will be focusing on the gloom and doom part that has been hitting the newspapers, social media to the extent that there is some ITeS Union as well that has come in. I will talk about those aspects later. First, let us have the Nifty perspective in place.

I have seen a couple of bold comments like Nifty will double again from current levels over the next 5 to 7 years etc. foreign investors are still bullish on India etc etc etc. My take - we have been in a structural bull market since 2013 [some of my more experienced peers say from May 2009 - ok I buy that] Through Twitter, I had mentioned last week that a close below 9450 would be initial signs of weakness. My number is 9480 to be precise and I will be watching out for that this Friday as well. If the close happens to be below the 9450-9480 zone, it will be a confirmation of short-term weakness.

Another aspect we must not forget is that the dynamics of Nifty have changed significantly over the last 10 years. Earlier, Nifty was largely sensitive to Reliance, L&T, Tata Steel but that has changed. Some intelligent analysts renowned in social media have also been pointing out the same. Let us review the current Nifty 50 snapshot as of this week

One may review this file that can be opened with this link

I have taken the top 15 companies by relative weightage contribution to the index. With the telecom consolidation and volatile environment in IT/ITeS sector, some pain is on the cards. I have qualified the impact of recession on that particular stock. A careful look will tell you that the most severely affected firms are IT companies and banks. We need to understand one key thing; when we take the downward impact of IT/ITeS sector, the re-organization drives at telecom companies post Jio and the impending consolidation in the banks, the net impact in terms of affected persons would be at least 15 million [1.5 crore people!] What we many a time fail to realize is the multiplier effect. Every 100 direct jobs added in the IT or Telecom sector also added about 30 jobs indirectly.

That being said, I also disagree with the nay sayers who are predicting gloom and doom. There was so much panic and gloom in 2008 when the blood bath started and Nifty rapidly fell from 6357 to 2252 within a span of a year. From that point, Nifty scaled 6338 again, went all the way down to 4500 and hit 9k levels. From there it came all the way down to 6800 odd levels and now we are near record highs yet again. I do foresee a correction to about 6800-7200 levels once.

One key reason for my alarm bells on an impending correction is the market breadth. There is a divergence in index levels and overall market breadth. A few select stocks are taking the indices higher while a lot of stocks are actually going down. The distance from peak levels for a lot of stocks suggest a distribution pattern. The way mutual funds are advertising the SIP route with emotional appeal, my suspicion levels are inching upwards.And as I always maintain, corrections are good for the market and healthy too. I am particularly negative on the banking sector at the moment. The unsecured credit that is at risk at the market is near record highs. The aspirational young Indian is highly leveraged and by the time the restructuring exercise hits its peak in sensitive sectors, NPAs will be severely on the rise. For the first time perhaps in Indian banking sector, retail segment NPAs will outpace the business segment NPAs.

That being said, it will not be the end of the world. After dot-com, we had doom predictions; after Lehman Brothers, we had doom predictions. The same will happen again. The so called pundits and media spokespersons have selective amnesia and wrong anchor points. Even if we have a 25% correction from current levels, the markets will be way higher than they were in Jan'08 or Nov'10

In the next few posts, I will be discussing not markets but industry analysis and future prospects for people affected by organizational restructuring. Stay tuned and enjoy the ride

Thursday, April 20, 2017

Outlook For FY18

Dear Readers
It has been more than 15 months since I last posted on this blog. Going in for a recap, the markets shrugged off its fear and moved on to scale new highs.

I had indicated that base metals and banking stocks would lead the rally and that happened. However, the gigantic leap that the indices have taken was definitely far beyond my expectations.

As I always keep saying, history has a hidden engine and can reveal patterns. For all practical purposes, the bull party for now is in this last stage for now. Going back to the 2010-2014 pattern, Nifty had peaked at 6338 in Nov '10 and then went on to touch 4550 levels; from here it scaled 6415 to fall to 5200 levels in Aug '13 and then came the big bang rally with BJP taking in power.

Without taking any externalities into account, a pure pattern extrapolation gives me the following picture

A top around 9338-9357-9415 levels for now with the technical bottom set at 7800 levels. IMHO, Nifty will retest these levels over the next 18 months before resuming the next major leg up. That leg will coincide with the May '19 election outcome. Assuming status quo, the BJP is set to win the next election as well; should the same happen, the new high on Nifty will be in 5 digits; [10425 is my target on Nifty and 34500 on Sensex]

Most of the trend experts also agree on the same; the only question is the timing. A large section of analysts believes that the 5 digit mark will be surpassed this year as well. Though not impossible, I have my reservations. [Reasons will be covered later]

The reforms on the economic side have been largely positive. A lot of revenue leakages in the PDS have been plugged due to use of Aadhar. The exchange rate has strengthened but my contrarian view is that the dollar is headed to an exchange rate of 72 vs rupee and hence its time to go Long Rupee-Short Dollar

The demonetization drive is a positive for the very long term. A lot of people are harping about the positive effects of GST roll-out but we need to be pragmatic. The positive aspect of the GST is that it will greatly change the supply chain and distribution networks. The number of warehouses and distribution centres will drastically come down and generate economies of scale. Coastal shipping will see a big bang [albeit positive] explosion; the pilot successes that we are seeing right now are a tiny fraction of what the real game will turn out to be

On the downside, I personally do not view the GST as a big success as the media and government are portraying it. If we look at our Asian peers that implemented GST/VAT [Thailand and Singapore are my role models for the same], they kept the rates at 4% to 7% [except for items tobacco products, liquor etc]. The whole idea of GST/VAT in a country is to keep as low a marginal tax rate as possible and have a tax net as wide as possible.

For instance, a standard FMCG supply chain would be
Factory -> Distribution Centre -> Super-Stockist -> Stockist -> Point of Sale
In the conventional GST / VAT setup, when goods move from factory to the point of sale, each time ownership of cargo is transferred, GST/VAT is applied to the value of the sale. When the tax rates are kept in low single digits, the incentive to cheat on taxes greatly diminishes. Rather than forge account books, hire a chartered accountant, hide the cash somewhere else etc, the entity in the supply chain decides that it is better off paying the low taxation rate.

The stated purpose of India's new GST regime is that the tax evasion must be curtailed. Sorry Mr. Arun Jaitley and team, your new GST proposal does nothing to remove the threat of tax evasion. Every time this issue is raised by the media, the government offers a rebuttal saying that demonetization was implemented in parallel; fine that was for the tax evaded earlier. Earlier, the evaded tax was hidden in denominations of 500/1000; now the same will be done with the 2000 rupee notes. If we want to genuinely widen our tax net, the marginal rates of taxation should be extremely low barring a few products.

One of the most positive developments in the Indian banking space is the merger of all subsidiaries of Statebank into one single unit. However, this is just the beginning. What now needs to be done is a massive restructuring with more automation, rationalization of headcounts and branch offices. It does not make sense to have 8-10 small branch offices, all displaying the new SBI logo. That is just a cosmetic change; unless there is a complete overhaul of the backend, people won't receive the intended benefits. Another major positive of this exercise is that it sets a positive for other PSU banks to carry out a similar exercise. Rather than many small/medium sized banks, India needs a few large scale banks.

For the securities market as a whole, a major positive has been the rise in SIP collections of mutual funds. The advantage of SIPs is that one can reap benefits of crests and troughs of the indices and still come out on tops [of course the fund selection is critical]

From time to time, people in my network ask me why I ask them to continue with SIPs if I have a conviction of correction; the answer is simple - nobody can predict the market with certainty. By keeping an SIP with constant fund and variable units, you can take advantage of both peaks and troughs.

From a stock specific perspective, base metals and commodity stocks have generated 300% returns or more in the last 18 months. Hindalco had its old great wall of support at around 210 levels [pre-2010 levels]. When this broke down with conviction, it went all the way down sub-100 levels also. Hence I see a very good chance that Hindalco is on the verge of topping out. Similarly for Tata Steel, going beyond 625 is challenging.

IT segment will be subdued till the new laws are fully clear with regards to outsourcing. FMCG will be sluggish due to the onslaught of Patanjali. Whilst the markets are looking at the positives of banking sector, the cleaning of balance sheets and resource rationalization will come with its share of negatives.

Global Uncertainties
The picture post-Brexit will only be clear after the UK elections in June. It is a positive for UK citizens but we can expect a lot of turbulence from the Euro-zone in 2017. The EU has a succession planning challenge unless the countries decide to go ahead with an extended term for Merkel. The threat of a Euro-zone blowout still looms on the global economy. The situation is "Who will bell the cat"? The entire PIIGS fraternity wants to opt out but no country wants to be seen as the first to do so. UK managed to do that because it has its own currency GBP. That being said, such downsides on the economy will be short-lived. Eventually all countries will bounce back. I have always maintained that currency devaluation eventually brings out a lot of positives. When the Asian Tiger currency crisis took place, a long-term development was that a lot of people started taking vacations to Thailand, Singapore, Malaysia etc. The revised exchange rates favored the same and there have been numerous instances when a Mumbai-Singapore or Delhi-Bangkok flight ticket has been cheaper than a domestic sector. The day is not far when we will be taking vacations in Greece, Italy Ireland at almost the same cost as we do for Singapore!

The real challenge will be the geopolitical stability over the next couple of years. There is a strong correlation between a Republican president coming into power after 2 consecutive terms of a Democrat president. Almost every time this has happened, a major terrorist attack follows within 12 months and wreaks havoc. What we are seeing now in wake of Trumpism is just the tip of the iceberg. There is a very strong possibility that we will see a repeat of 9/11 soon.

Nevertheless, we can take it in our stride in India at least. The longer term trend is positive. If the current central government keeps its momentum and follows up on the measures, a 2nd term is almost a given. If that happens, then we can see the dream of Nifty breaking the 5 digit barrier.

Happy Investing - focus on largecaps now

Friday, January 29, 2016

Outlook For CY 2016

Belated season's greetings to all. Due to personal reasons, I could not update the December post on time. This post not only aims to give a perspective for Jan '16 but overall for 2016 as well

The Nifty opened 2015 at 8272 and ended 2015 at about 7950. The high was almost 9100 and the low was 7540. In statistical terms, this effect is called regression to the mean. 2014 was an outstanding year with gains exceeding 40% on both index level and stocks were a different ball game all together and midcaps were roaring. After such a fantabulous 2014, it was fairly logical that the index will take some time to pause [The normal 5 year trend on Nifty is about 15% to 20% CAGR]

We see this all the time in day to day life as well as specific sectors in the industry. Sometimes core manufacturing is the darling of the market and IT lags behind or sometimes it is the other way around. People are talking about GST kicking in and benefits due to accrue etc but most of all that is already in the price. The commodity crash has been severe though India has not been able to reap too much benefit due to significant rupee depreciation against the dollar. 64.25 was a firewall breach and 60 is the new 40 [in the 2008-2012 cycle, 40 was the base when breached first assaulted 44.25 and then 48.25 finally finding an interim top at 52.25]

Even before I get to the specifics for Nifty, I must mention that commodities are in their last phase of the downturn. The dollar index has in all likelihood topped out for now and will make a slow retreat towards 85 levels and that will boost prices. Crude almost always works around a weighted average price of 65 dollars a barrel in a 5 year cycle. That was the reason why I was bearish on crude when it was in 3 digits in dollar terms and was anticipating a move towards 65 last year. However, the accelerated fall after that was certainly not anticipated and I can stick my neck out and say that it is not sustainable.

The cost of production itself in most countries is almost 30 dollars a barrel whilst in regions like North Sea, it is much higher than that. Fundamentalists can talk all sorts of BS about fracking and demand slowdown but it doesn't cut ice. Then there are conspiracy theorists who talk about prices being artificially kept low to tackle Russia, IS etc etc and that also is BS. Prices will find their way up and we should soon be looking at crude hovering around the 65 to 75 dollars a barrel mark.

For the base metals as well, prices are in the last phase of fall and the only way is a gradual upward move. Note that upward moves take much longer as compared to falls.

Let us start with Nifty first
Nifty typically has its cycles timed as per general elections. We saw that when it made a top of 6357 in Jan '08 [a bull market uptrend that started with UPA 1]and the technical bottom for that was around 3900. The Lehman brothers crisis took it to almost 2250 levels and prices quickly bounced back towards the technical bottom. May 2009, UPA 2 comes into picture, QE1 comes into picture and Nifty again made a top of 6339 in Nov '10.
The corrective phase continued for a long time, a bottom finally formed at 4550 odd levels and the fresh upmove began. The next major phase of  upside came post-May '14 when NDA came into power again. Time and again Nifty has proven to go through the general election schedule with large moves coming when a new powerful government assumes office and then go through a corrective phase in terms of price as well as time.

I think that is going to be the case again this time and whilst there will be a lot of quarterly swing peaks and troughs, I have my reservations as to whether Nifty can make a fresh high in 2016. Its all about individual stocks for now and based on my commodity evaluations, stocks with core commodity products are the ones that have the highest alpha factor i.e. gains in these stocks will most likely outperform the index by a huge margin over the next couple of years.

The problem with most people in general is 'wrong anchoring'. Most people have anchored themselves against the 2014 performance and are feeling jittery about the way markets have panned out in 2015. Also, the index level is masking a critical fact that there are a lot of stocks that have corrected upwards of 20% to 30% in 2015 and hence a weekend review of the portfolio shows blood red returns. On the other side, the IPO market is booming with gains upwards of 20% to 40% on the day of listing. Whilst our television anchors are cheering that and business writers are gung ho about the arrival of the retail investor market, I would take this as an alarm bell.

Although I did not participate in markets till 2011, the signs that I see are ominous. Every possible red flag is being ticked on my fundamental radar
IPO market boom: The 2005-2008 period saw an IPO boom. Stocks were valued like crazy; remember the like of Shri Renuka, Educomp, Suzlon, DLF, HDIL etc etc? Where are they today? It was on the basis of these stocks that trade pundits had signalled the arrival of the new age of retail investors. Most of them vanished by 2010
There is a strong correlation between retail investors entering the market with imaginary clubs and swords to conquer their way to wealth and then see the market correct big time. [Statistically, only correlation can be established not causality]

Then there is this frenzy about anything and everything digital and online. We saw what happened in 1999-2000 with the dot com bust. Anything and everything with a dot-com was valued in hundreds of millions and billions. Then came the big crash. This time, a lot of people are talking about how it is different and we are looking at an app-based mobile themed users, better awareness etc etc etc. Whilst I totally believe that technology is an enabler and that it can help us do many things with minimal effort, I am not convinced about the crazy valuations being attributed to the firms engaged in this business. We have already seen what happened to Zomato, Tiny Owl, Housing etc.

For every Flipkart or Snapdeal that is successful, there are at least 90 other failures out there. Last but not the least - all support services and businesses like retail, facilities management, capital markets are fundamentally dependent on core industry performance. Unless brick and mortar businesses do not thrive, there won't be a financial economy for services! Another thing that is bothering a lot of 'fundamental analysis' experts is that why are stocks going down when low commodity prices are not triggering a gain for stocks as margin expansion is so very evident

There are 2 parts to answer this question
1] Markets discount the future well in advance; most of the perceived gains by low input costs were factored in stock prices well in advance

2] Velocity of Money: Remember that at the end of the day, all major commodity settlements [Gold and Crude Oil being the highest] are done in USD. The low oil prices and relative dollar strength have depressed significantly due to the commodity price crash. The lesser the dollars flowing through the economy, the lower the liquidity in the system.

Although it sounds counter-trend but money flow is very critical to prop up markets. A lot of positive returns on stock and bond markets have been already deployed into real estate globally. The lower commodity prices have taken liquidity flow out of the global economy like a sponge that absorbs water. Remember that both governments and banking systems are heavily dependent on commodity prices. The oil revenues maintain flow of dollars and are an easy source of tax revenues for governments. Oil exploration being a capital intensive project means that debt levels of upstream oil companies are significantly high. A large chunk of recent loans were raised with expectations of oil not breaching $75 dollars on the downside. With the current oil prices, firms are not able to breakeven on their variable costs; forget taxation and debt servicing.

So for fundamentalists who expect lower oil prices to fuel the economy, its not going to happen. And time and again I would like to remind readers that we have been through this commodity price crash. 2001 was the lowest point for commodities and so was 2008-2009. Neither the bonanza of upside can continue uninterrupted nor the gloom at the lower end. Last but not the least, certain minimum prices of commodities are vital to keep liquidity in the government, banking systems and also for jobs

Now let us come to Nifty and BankNifty

Nifty has very strong support in the 7200-7400 as rightly pointed out by a lot of experts. Now some of the top notch experts have been calling for 6900, 6600, 6300 etc. Whilst I cannot say with certainty that it will not happen, that would be a Black Swan Event. There are a couple of experts who have rightly likened the correction to that in the 2010-2012 period

Recap: Nifty made a top of 6339 in Nov'10 and went into a corrective mode. The large moves unfurled as follows
6339-5690-6181-5177-5944-5196-5740-4728-5400-4531 over a period of 13 months from Nov '10 to Dec '11
[13 months of correction]
Also note that barring a few large swing sessions in either direction, bulk of this correction period was actually spent in a range of 5400-5600


In the current scenario, Nifty topped around 9100 levels in Mar '15 and has been making lower lows and lower highs. Based on similarity of patterns, I am inclined to believe that 7200-7400 [give or take a few points] is the most likely technical bottom for now and corrective bounces are likely from here.

In terms of time, 13 months from all time highs will be in mid-April
Now recoveries may take time as moving up is always difficult compared to moving down. I also do not believe the contrarian view that we can see a fantastic year for equities and old highs will be taken out etc.

For those who are crying bearish; the last time we saw USD-INR in the 68 price range was in Aug-Sep '2013. Nifty was at 5100-5200 levels at that time. Today it is at 7200-7400 range
It all depends on where one is anchored
The bond markets and banking liquidity is largely a factor of confidence. At the same pitiable USD-INR exchange rates, current index levels are much higher and that speaks for itself. The problem with the bears is that they are anchoring themselves in the 8600-9100 [and perhaps a lot of retail investors too as they tend to buy at tops]

On the other hand, there are some leading stocks that are back to price levels when Nifty was correcting earlier in the 2011-2012 period
SBIN - From highs of 3200 in 2010 came all the way down to 1500 levels but spent most of its time in the 1800-2200 range

Taking into account the 1-10 stock split, it is exactly doing that now

Tata Steel: It did not break 195-200 range on a weekly basis in the previous correction. Right now also it has shown no signs of breaking down below 200

So what do we really expect for 2016 here on now that Jan is almost over

The Bear Camp: Shankar Sharma, the Big Bear of India [who rightly called the crashes earlier as well] has said that we must not rule out Nifty retesting the old top of 6338-6357

The Bull Camp: Mahendra Sharma, a perma-bull has called for a Nifty top of 9500 in 2016

My humble 2 cents
Barring Black Swan events, I neither see any significant downsides from current levels nor do I see any new highs being made. My unequivocal stance is that things are not as bad as they are pointing out to be nor things are as hunky dory

In terms of price we may have bottomed out for now or maybe - just maybe have one more flick down before starting a counter-trend rally to the larger correction of 9100-7200
A minimum 61.8% upside will mean that we should be able to visit 8200 levels over the next 6 months. Barring some large swing sessions, we are likely to trade in the 7400-7800 range [lowered from my earlier range of 7800-8200 based on current price action]

The large upside trigger in the short term for India is the Union Budget and GST
Another major trigger will be the USD-INR exchange rate
Time and again I have mentioned in my tweets that 64.25 was a firewall breach.
Now, the faster we move back to 66.25 and ideally 64.25, the faster will be the recovery in indices

FMCG will not be that big a game changer now as it was earlier
Patanjali has made great inroads into rural markets where it has a dominant price and perception advantage. Also the entry of Patanjali has sparked off volume, price and margin contractions on the urban front. So yes FMCG is still going to be a safer haven but the rate of growth will be much lower and slower

Likewise for pharmaceuticals, they will be safe havens but with price controls coming in, the best return days are history

Another thing that one must be cautious about is the stupid commentary that is doled out on tv. Every now and then, there will be an expert talking about 'delivery based buying' and 'delivery based selling'. I have covered this point earlier as well and will repeat it; delivery based can be a large transaction only. If a large delivery based buying has taken place, it means that somebody has offloaded a large chunk of holdings. Unless there is stock available in the market, how can one complete a delivery based transaction?? Similarly, if delivery based selling has happened, somebody has offloaded a large chunk and the transaction is through, there have been buyers. Delivery based volume always is 2-sided i.e. there is a buyer and there is a seller.

Yes delivery based values are critical as it gives an indication whether the security is really changing hands for good or one is just using the leveraged system to trade. At approaching bottoms, usually delivery based transactions gain steam. At major tops, it is rare to see large volume transactions as the big fish like to slowly distribute and palm off their holdings.

'Never ever let yourself be misled by commentary about delivery based buying or delivery based selling has taken place. It is just a high volume delivery based transaction with willing buyers and sellers' [Who is smarter of the two, that only time can tell ;)]

For traders, this is a good time and to gauge medium term trend, one good indicator is the Stock PCR based on FnO BhavCopy released by NSE at EoD. The index PCR is largely a lot of noise as there are crazy option contracts for far strike options on both call and put sides. Stock Options being relatively illiquid in India with only select stocks having large volume transactions on both calls and puts

The piece below is what I use for getting some clue on swings based on Stock PCR
<0.48 -> Bearish. Smart money is betting big on the short side of the market and are transacting heavily on the call side to protect themselves. Note that even the large market players can't predict which way things will go due to numerous uncontrollable events. With the power of big money, they can build short future positions, buy in the money calls and short out of  money calls

Between 0.48-0.54: Rangebound and sideways. In this range of Stock PCR, on a daily basis, one may see a large upside day or a large downside day. However, extrapolate on the weekly basis and one can see that actually the market is not going anywhere big time.

Between 0.55 and 0.62: Bullish - this usually happens when markets are at extreme lows on multiple time frames. Smart money is bottom fishing and buying big time. They are buying in the money puts in abundance to protect the portfolio. Like the bearish case scenario, the risk-reward starts favoring the long side

>0.62: Bearish At such large levels of stock options, it is extremely bearish. Even smart money is in panic mode and is desperate to protect the portfolio and minimize losses

Note that these are some guidelines I use basis some inputs from a very good friend. It is not a bible and not cast in stone. If one observes the falls that started in early Dec '15, large downswings started from the day Stock PCR hit 0.68. Just when things were beginning to look good with retracements of falls, Stock PCR nudged towards 0.45 triggering the next major fall.

This is just one cursory indicator - the main paramters will always be Price, Volume, Time and technical indicators like MACD, RSI. However, Stock PCR does help to keep a nimble approach. And the fact of the matter is that almost 50% of trading days are in range-bound sideways trades!

Now one of the critical questions is what to buy???
This is a time to be stock specific and some stocks are in sweet spots for accumulation

SBIN - 140-180 is accumulation zone for targets 300+
ICICI Bank - 150-225 is accumulation zone for targets 400+
Axis Bank - 250-350 for targets 600+
Tata Steel - 150-250 for targets 350+
Hindalco - 50-80 for targets 150+
Cairn - 80-150 for targets 250+
ITC: 270-320 for targets 425+

Note that these are on a longer term basis with a 3-5 year horizon. There are many more that I will keep posting through Twitter. Also note that I have personal holdings in some of the counters mentioned and have advised people in my network to consider accumulation in the given counters

So enjoy the roller coaster ride of 2016
There will be some more updates on the basis of Statistical correlations that I will post in the first week of March post-budget

Wednesday, November 4, 2015

Outlook For November 2015 / Diwali Updates

Well October was quite lackluster in many ways. The much awaited relief rally did come through and stocks spent most of the time in narrow ranges. That is precisely how markets behave. August was sharply down and extended that to some extend in September with some smart recovery towards the end.

Going by the law of averages, November-December period should be pretty exciting as far as traders are concerned.

On the downside, 7925-7980 levels will be critical prior to Diwali. As long as these levels hold, we should have a build up for Mahurat trading that I am personally optimistic at 8625 odd levels [or 8400 levels towards 200 DMA at least technically] Wherever the relief rally ends there would be a correction after that. The correction can be deep or shallow and that depends on multiple factors.
A simple correction would imply a retest of the 7500-7600 levels from where the next leg up should take place. There is a minor possibility of a sharp correction towards 7200 levels and that can be easily determined by the Rupee-Dollar exchange rate. In the August-September period, I had updated via Twitter that breach of 64.25 in USD-INR implied a firewall breach and that is exactly how things panned out. To the extent USD-INR stays above 64.25, rallies on Nifty will get sold into. The more time USD-INR spends closer to 66.25 levels, the greater is the danger of correction not stopping at 7500-7600 levels and going below.

However, we should take things one at a time. Until Diwali AND to the extent 7925 holds, the risk-reward is in favor of buying. The Diwali rally should be used to liquidate some of the portfolio holdings as well. Post Diwali, if the negative indicators listed above start popping up on the screen, some shorts can be initiated.

Critical Levels at different timeframes as of now [All values at end of respective time-frames]

Daily - Bearish till below 8080 [Apprx]
Weekly - Bearish till below 8180 [Apprx]
Monthly - Bearish till below 8280 [Apprx]

However, a short term Diwali pataakha is on the cards IMHO

Fundamentally, we should also note that a lot of FIIs have book closing scheduled for December [Most developed nations follow the calendar year as fiscal year unlike India that follows an April to March period]. So there will be profit booking across emerging markets to plough money back to the parent firm, pay out Christmas bonuses, repatriate profits etc. This very much falls in line with the technical outlook as well. With the current USD-INR rates, we also need to remember that it is far less rewarding to repatriate money from India and this augurs well for a moderate correction. After that will come the Santa Rally into New Year.

Taking fundamentals and technicals both into account, we have the range pretty well defined

Optimistic: 8025-8625-7600-8200 for Nov-Dec combined
Pessimistic: 7925-8425-7200-8000 for the same period
[Day to day fluctuations will keep varying but the broad script will go on these lines IMHO]

From a fundamental perspective, what are the positive triggers for the markets???
The GST implementation will be a major positive trigger even if it say starts with 5 or 6 states on a pilot basis. It will provide steroids to the market

The USD-INR exchange rate - if things work in favor of rupee dollar and it manages to reclaim 64.25 or lower levels [i.e. gets stronger], markets will go in favor of bulls

Major negative triggers
Most of the standard negative triggers have also been factored into the price
Rupee Dollar, Euro-zone stability, oil prices etc

The other negative triggers will be in the form of Black Swan events that nobody can predict and have to be taken as and when they come

Statistical Correlations
There has almost always been a statistical correlation between 2nd consecutive term of a US president into his 3rd year and a sharp correction. We are into that phase at the moment

The technology stock mania. Whenever asset bubbles have emerged to alarming proportions in the technology space, markets have tumbled. It happened in 2000 with the dot-com bust. Now we can see crazy valuations creeping back again in the hi-tech space. Don't get me wrong - I am all for technology and productivity improvements, Whether it is booking tickets over an app, reviewing restaurant reviews, buying books / gifts online, hiring a taxi, the e-commerce wave has significantly improved time and resource management. These technologies are here to stay and become part and parcel of daily life. What is alarming is the crazy valuations and a mania surrounding the same. Survival of the fittest will come through and initial partners exiting businesses will come through and at some point of time, the sweet music of funding will stop

Food tech apps are already feeling the heat. Zomato with a billion dollar valuation had to lay off 300 employees???

Let us be very clear on fundamentals - whether it is speculators / investors in the stock market, banks or technology enabled businesses - they thrive on real businesses i.e. the brick and mortar businesses. Whether domestic or international, there has to be on the ground action for manufacturing, capital goods, infrastructure. Only when these businesses move on a sound footing will other support functions thrive. The masses in general need to have disposable income to allocate higher spends on cars, movies, shopping etc. With rising education, food and housing costs, disposable income is actually on a downtrend. The weak commodity prices are a boon for some companies but bane for most manufacturing units.

Without a robust economy in place for brick and mortar business, things will never be on track. 2015 has been a painful year for the entertainment industry with significantly lower footfalls / collections. That just goes to show how sceptical mass psychology is. Social mood is not so optimistic given the fact that low commodity prices have hardly affected disposable income positively. Crude prices crashed over 50% but the transmission to consumers has been less than 20%. The commodities where demand is inelastic [pulses, cereals, grains etc] are seeing prices go through the roof.

So coming back to the investment themes, as I have been repeatedly saying Gold and Silver are actually fantastic themes to get into. When we look at the longer term trends and adjust for inflation and exchange rates, precious metals tend to have a 13-3 cycle. 13 years of a bull run followed by 3 years of correction. We are approaching the end of the 3rd year and gold in dollar terms will start appreciating by 10% PA pretty soon

Crude is a wonderful investment vehicle. The challenge is that one has to go through MCX. I would strictly advise against leverage although brokerages encourage that. One can take longer term contracts on the basis of liquidity and keep going for the mini lots. In dollar terms, a bottom is almost in place and in 12-18 months, we will be staring at WTI Crude above 65 levels if not more IMHO

This is a good time to book profits in Stocks / Mutual Funds that have delivered good returns and convert to these themes. Real Estate, a sector that has been languishing due to abnormal pricing and excess inventory is now looking attractive. Prices have started showing reasonable correction and builders are doling out offers. From city to city the dynamics change and one would have to consult local experts for the same.

So enjoy the festivities and remember that the blue chip names that are lagging behind are the ones that will end up giving the 'alpha returns'. Stay tuned to the Twitter feeds for regular updates