In a range: Weekly Market Report

Nifty may move between 4,830 and 4,915

Extending its gains for the second week in a row, the market settled at its best weekly close in five weeks on positive economic indicators, giving rise to speculations that the RBI in its quarterly policy review later this month might lower interest rates. Signs of easing of the debt situation in Europe also augured well for the market, which closed with a gain of 2% at the end of the week.

The prime minister’s comments about lower economic growth pulled the market lower on Monday. Global rating agency Moody’s upgrade of India’s short-term foreign currency rating and an 8.49% spurt in passenger car sales in December led the indices higher on Tuesday. But nervousness ahead of the earnings season saw the indices closing flat on Wednesday

Positive economic indicators were overshadowed by subdued dollar-revenue forecast from IT giant Infosys, leading to a negative close on Thursday. Firm global cues helped the benchmarks in achieving a green close on Friday. The Sensex closed the week at 16,155, up 287 points and the Nifty gained 112 points to 4,866. We may now see the Nifty making a range-bound move between 4,830 and 4,915.

In the sectoral space, BSE Realty index soared 14% and the BSE Metal index jumped 10% while BSE IT tumbled 7% and BSE TECk declined 4%.

Among Sensex stocks, Tata Steel (up 14%), DLF (up 13%), Hindalco Industries (up 12%), Sterlite Industries and Larsen & Toubro (up 9% each) were the top gainers. The losers were led by Infosys (down 7%), TCS (down 7%), GAIL India, Bajaj Auto (down 2% each) and Hindustan Unilever (down 1%).

The top advancing stocks on the Nifty were Reliance Power (up 22%); Tata Steel, Jaiprakash Associates (up 14% each), Reliance Communications and Sesa Goa (up 13% each). The main losers on the index were Infosys (down 9%), TCS (down 7%), HCL Technologies (down 5%), GAIL India and Bajaj Auto (down 2% each).

Led by a recovery in manufacturing output, industrial production grew by 5.9% in November 2011 after witnessing a 4.74% contraction in the previous month. The resurgent industrial production numbers are likely to boost the sentiment in the economy and may also help the RBI go for rate cuts in the near future.

Food prices fell for the second consecutive week as food inflation remained in the negative zone at (-)2.90% for the week ended 31 December 2011 compared to (-)3.36% in the previous week. The fall in the rate of price rise of food items since the first week of November is substantial, as it has plummeted from double-digit territory into the negative zone.

However, headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010 and stood at 9.11% in November 2011. Figures for December will be announced on Monday.

Notwithstanding its inability to open multi-brand retail for foreign investment, the government on Tuesday notified 100% foreign direct investment (FDI) in single-brand retail. However, in respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% would have to be done from the domestic small and cottage industries which have a maximum investment in plant and machinery of $1 million (about Rs5 crore).

In international news, rating agency Standard and Poor’s (S&P) has lowered the sovereign ratings of nine Eurozone countries, including France and Italy, a move that reignited concerns over the fiscal sustainability of the region. The downgrades—announced after US markets closed on Friday—are likely to be a dampener for financial markets as investors are likely to sell euro, Eurozone equities and sovereign bonds.


Goodbye, Mr Market

New guidelines for public shareholding of listed companies may offer convenient exit route for some companies wanting to avoid public scrutiny

Corporate laws and frameworks are generally supposed to protect consumers and the society, at large, from any wrong doings incurred by a company. However, the newly revised guidelines of public listed companies drafted by the ministry of finance may actually provide an exit route to some of the companies which would prefer to avoid scrutiny and ire of shareholders and general public.

According to the revised guidelines, “all private sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public holding of at least 10%.” The deadline for this compliance is June 2013, roughly 18 months from now. The threshold was 10% in 2001, before being raised to 25% in 2006. However, there were relaxations in the regulations allowing companies to have promoter holding of up to 90% in most cases. This is the first time that the 25% public share holding mandate (and 10% for PSUs) will be strictly enforced by government authorities. had recently come up with a report naming as many as 18 potential de-listing candidates which may not comply with the new revised guidelines issued by the ministry of finance in August 2010.  According to the report, some of these companies are “fundamentally strong multinational companies (MNC) [who] may not have the inclination to increase their public holding and may resort to delisting to have better flexibility in taking business decisions.”

Incidentally, some of the companies in the list had been covered by Moneylife in the past, namely: Oracle Financial Services (OFS), Kennametal India, Honeywell Automation, Fairfield Atlas and Gillette India.

Bigger companies like OFS, owned by US-based Oracle, have the resources to go private and it might opt for this route. According to the report, OFS might have to cough up as much as Rs3,986 crore for buying back its shares. Similarly, Novartis India, Honeywell Auto, Timken India, Thomas Cook and GMM Pfaudler have enough in their coffers to exit the market.

However, we learn from the report that there are some good companies which may not have the requisite funds to pay shareholders at time of delisting. For instance, 3M India, part of the well-known 3M and inventors of Post-It Notes, has only Rs267 crore on its balance sheet, whereas it would have to shell out Rs1,000 crore at time of delisting, assuming its market price is same as today. Similarly, local companies Blue Dart, AstraZeneca India, Swedish-based Alfa Laval India, Gillette India, Wendt India, Singer India and Kennametal India are examples of companies which, currently do not have the resources to exit and might have to borrow funds for this purpose. Further, Gillette India was cited as a ‘value destroyer’ in our 17 January 2008 issue of Moneylife.

We had covered Kennametal India in its reputed Street Beat section as part of the 26 January 2012 issue. The Moneylife team valued the company at Rs450, which is well below its current price of Rs789 (as on 13 January 2012). Hence, there’s a possibility investors will get a good deal in case the company decides to delist, if the price of the scrip doesn’t fall.

The report cites, “The chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.” Thus, some of the companies might want to take advantage of the new rules by exiting the markets, to focus on running their business, thus avoiding public scrutiny, endless compliance requirements and accountability.

The critical question to ask at time of delisting is whether a particular company offering a buyback is offering a “fair price” to the shareholders. According to the report, “The case for delisting becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations.” This may not be good news for investors who have bought shares in these companies at higher valuations during the market peak. Companies which have delivered poor returns for shareholders will obviously want to exit the market, further depriving of shareholders of any chance of getting back their capital.

It is not very good news to some companies either, as some of them, especially good ones, would be under pressure to offer securities to comply with the new requirements without having any regard to market conditions, which may in turn impact valuations that might prove to be harmful to shareholders.

Either way, we find that the new regulations do not provide an ideal situation for shareholders. Good companies do not generally delist as they usually make an effort to comply with regulations. The new regulations are merely giving a window of opportunity to companies who prefer not to be accountable to the public at large, and ultimately its shareholders.


Contra trend rise likely to continue after a brief pause

A brief consolidation is likely in the coming week which will set the tone for a rise during the end of the settlement or more likely till the end of the month.

S&P Nifty close: 4866.00

Market Trend
Short Term Sideways           Medium Term Down            Long Term Down

The Nifty opened flat and dipped marginally below the 4,700 point mark where speculative buying with some short covering saw the Nifty recover smartly to come very close the R2 level of the week. As expected, the Nifty finally ended the week 120 points (+2.51%) in the green. The sectoral indices which outperformed were BSE Reality (+13.10%), BSE Metal (+9.84%), BSE Power (+8.62%), BSE Capital Goods (+8.49%), BSE Bankex (6.14%), BSE PSU (+4.81%), BSE Auto (+3.67%) and BSE Auto (+3.59%) while the gross underperformers were BSE IT (-6.88%) and BSE TECk (-4.46%).   

The weekly histogram MACD remains below the median line (though marginally) implying that even though we are in the midst of a contra trend rise the intermediate term trend remains down. The recovery continued on high volumes indicating further strength. Last week those who remained long as per our assessment are sitting pretty. For this contra trend rise to go farther the Nifty should not breach the immediate crucial support area between 4758-4780, decisively, even though the retracement levels of the recent rise from 4,531-4,898 points are pegged at 4,758, 4,715 and 4,671 points in the ratios of 38.2%, 50%, and 61.8%, respectively. Dips should be used for creating fresh longs with appropriate stop loss levels.

Here are some key levels to watch out for this week
  •  As long as the S&P Nifty stays above 4,820 points (pivot) the bulls can breathe easy and the onus is on the bears to put a lid on this contra trend rise going higher.
  •  Support levels in declines are pegged at 4,741 and 4,616 points.
  •  Resistance levels on the upside are pegged at 4,944 and 5,023 points.

Some Observations
1.    The bulls have broken the shackles and the bears will find it difficult to pull things back immediately.
2.    We saw the Nifty hit 4,815 as well as 4,882 points (50% and 61.8% retracement levels of the fall from 5,099-4,531 points) last week.
3.    This corrective rise shows strength and could move up to 4,965 and 5,068 points (50 and 61.8% retracement levels of the fall from 5,399-4,531 points) in the weeks ahead.
4.    This seems to be the best chance for the bulls to capitalize on the gains of the last two weeks and push prices higher during the end of this month, albeit after a brief pause.

As mentioned in the last week’s piece we expected a small top on the 13th which seems to have taken place, but no significant downsides seems likely unless key supports are broken swiftly. A brief consolidation is likely in the coming week which will set the tone for a rise during the end of the settlement or more likely till the end of the month. If things play out as expected then one should look for exit opportunities at the end of the current F&O settlement or ideally the beginning of the next one.

(Vidur Pendharkar works as a consultant technical analyst & chief strategist,


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