Wednesday 30 September 2015

Kaveri Seeds:The Great Downfall Saga-----Should We Enter Now ?

Technical Charts:





 


CMP: 426

Buy: 426-413

TGT: 446-487 (1-6M)

TGT: 487-513-668-725 (12-24M)

TSL<395



Note: Consecutive closing below 395 for any reason, KSCL may dip towards 345-300 zone, where it can be again accumulated for investment purpose (depending on the news flow).

KSCL has dropped by almost 60% from its all time high of around 1075 in the span of six months.
Primary reasons of its super fall might be:

Although the company was expected to to report double digit growth in revenue, in Q2FY16, KSCL actually delivered 20% drop in revenue and 5% fall in net profit. The revenue fall was very disappointing as the company did not take part in active marketing in high credit markets of Maharashtra (MH) fearing bad debts amid a very sad state of farmers there. MH govt also reduced the prices of cotton seeds and consequently KSCL withdrew itself from the MH market albeit temporarily.
 
Also, unattractive cotton prices, deficit monsoon in cotton growing areas and resultant shift in acreages reduced the demand of the cotton seeds and its volume fall by almost 26%.
 
Thus agrarian crisis and resultant pressure on the Govt to alleviate the suffering of the farmers are leading to more state interference and free market mechanism of the agri seed business, including cotton seeds also.
The overall shabby situation in agriculture, specially in TNG/MH region along with competition from smaller seed companies is leading to inventory pile ups .The Govt's price intervention is also adding wounds and creating an uncertainty over the overall agri seed business outlook. 

There is also some royalty payments issue with Monsanto (technical know-how partner). As par reports, for every bag of cotton seeds KSCL sold (around 900-930), it has to pay royalty @120 to Monsanto. But KSCL is paying Monsanto @20 only as par directive from Telangana(TGN) Govt. TGN also issued a directive not to increase cotton seed prices because of weak monsoon. A case in this regard is pending in TGN HC and any adverse ruling from there could cost the KSCL around Rs.64 cr for which the company had not done any provisioning in its books of accounts so far (Q2FY16). This is a significant risk as that could cost the company around 15% estimated EPS (FY:16/17).

All the above issues had led to earnings downgrade by analysts and the scrip reacted so much !! But having said this, the scrip might be discounted to a great extent for the above set of negative news, going be the price action for the last six months.
Looking ahead:

KSCL is taking various proactive steps for better business in other agri products, having excellent demand potential with better margin reducing dependence on cotton seeds.

The Monsanto case will ultimately be decided in the highest judiciary (SC) and there will be ample time. Also as the State Govt and farmer's issue is involved here, the Govt might consider some subsidy in this royalty issue here to ensure proper supply along with required quality.
 
With softening of bank interest rate, we may see overall expected economic growth, better infrastructure  which may be also helpful for our rural economy and agri sector in the coming days.
 
Global commodity prices is perhaps bottoming out and we may see better commodity prices including agri commodity in the days ahead.
 
Thus, investment in KSCL may not be a bed idea at this stage.


As par BG metrics:
Current median valuation may be around:500
Projected fair valuations might be around:550-600-700 (FY:16-18)


SCRIP EPS(TTM) BV(Act)  P/E(AVG) LV SV MV 200-DEMA 10-DEMA
KSCL 42.26 109.88 10 553.07 432.09 492.58 723.82 441.79
KSCL 51.5 158.25 10 610.55 476.99 543.77 723.82 441.79
KSCL 61.7 221.55 10 668.28 522.10 595.19 723.82 441.79
KSCL 84.25 310.15 10 780.91 610.09 695.50 723.82 441.79

Monday 28 September 2015

Nifty Fut(Oct): Need To Sustain Over 7950-8075 For 8200-8325

Double "Dhamaka" Of  Rate Cut by RBI & MAT Relief By Govt/SC  May Help ?


SGX NF: 7880 (LTP)

NSE NF: 7896 (LTP)

Trading Levels: NSE NF (Oct)

  SL (+/-) 10 POINTS FROM SLR            
                 
  Intraday Swing  Trader            
      T1 T2 T3 T4 T5 SLR
Strong > 7860   7910-50* 8000-75 8095-125 8160-210 8255-80 <7840
                 
Weak < 7840   7814-795* 7760-698 7675-25 7590-40 7500-450 >7860









FOR  Conservative Positional Trader













      T1 T2 T3 T4 T5 SLR
Strong > 7860   7950* 8075 8125 8210 8325 <7840
                 
Weak < 7840   7795* 7698 7625 7540 7450 >7860
                 

Exhausted & tired of Fed drama, all our eyes will be on RBI on 29-th Sep. Its almost certain that RBI will cut rate at least by 0.25% . 

There may be four scenarios:

Hawkish Cut : If cut is 0.25% with hawkish tone of RBI; Nifty will be sold after rally up to 8125-8200 and we may fall again to 7900 zone. As in that case RBI may not cut further on Nov and will wait for Dec Fed move and watch domestic inflation etc).

Dovish Cut: Nifty will stay and consolidate around 8200 and may further rally up to 8325.

Dovish Cut with CRR/SLR/MSF tweaking and PSBS consolidation plan: Nifty may rally up to 8500-8675 zone in the near term.The same result will be there if RBI cut by 0.50% with no CRR/SLR tweaking also.


Hawkish/Dovish Hold: If there is no cut on Tuesday, Nifty will be sold off and it may fall up to 7549-7450 in the near term. 

Considering the various aspects of our macros and inflation trend, real rate of interest,  global/Fed scenarios (ultra low rate and easy monetary policy) etc, there should be no reason for a 0.25% rate cut, if not by 0.50%. 

RBI gov may raise issues of proper transmissions of previous rate cuts by banks and base effect of CPI/WPI and Fed hike probability in Dec'15 and stay hawkish/cautious.

Our market will take the 0.25% rate cut with such hawkish tone as negative in the sense of "too little and too late" and may sold off  after rallying up to 8125-8200 zone (buy on rumour and sell on news).

As par reports, SC may also take the matter of Castleton MAT issue on 29-th Sep itself . On last Thursday, Govt issued a press note officially and stated that FPI(s) will not have to pay any MAT prior to April'15, who has no "Permanent Establishment" in India. Those FII(s) originating from countries having DTAA agreement with India will also have not to  pay any MAT. 

This will make virtually all types of foreign investments through FPI(s) or FDI etc under clear tax rule and none them is now required to pay any MAT. Most probably, SC will take a similar view in Castleton case. 

FII(s) are not adverse to pay any tax, but all that they want a clear, consistent & predictable tax policy along with ease of dong business in India. Only then, they will be confident and bring further investments in India.

All eyes will be on the winter session of parliament to amend the necessary IT Act for this MAT issue and also on the Govt for resolving other such high profile legacy tax issues (Vodafone, Cairn etc) at the earliest. 

Also recent SC appeal by the Govt/IT Dept against AP HC order on Sanofi case need to be resolved early as India is not in a position now to tail the FII(s). 

But some clarity may be needed for Non-DTAA countries for this MAT issue. Hopefully, our Govt will provide that without any further delay.

While most of us are probably enjoying long weekend, our PM is working very hard over the weekend trying to "sell" India growth story in US with 4-Ds (Deregularisation, Democracy, Demography and Demand). 

Despite, China's prez and Pope's presence in US at the same time, NAMO is able to attract significant media coverage there (although mostly backed by Indian media), its a huge success. 

But follow ups action should also be there on the part of our Govt by taking various pro-active steps for reforms more boldly and mere "marketing" will not bring enough foreign investments.

Globally, there is no dearth of liquidity as all the major economy are maintaining "easy money" policy. At the end of the day, its up to India how to bring investments here.

Globally, Spain's regional election (Catalonia) may cause some mini turbulence for EURO as they are apparently voting for "independence" from  EURO area. UK may follow soon also.

Also all eyes will be on Fed's Dudley today to have an assessment how serious is Fed about Oct/Dec rate hike after Yellen's hawkish statement on last Thursday (after that she nearly fainted too !!)

Due to QTR end factor, we may also see some portfolio re-balancing to pop up NAV by fund managers and that may also cause some volatility.   

In the near term, there are three main factors for causing EM crisis:

  1. China jitters (over capacity in manufacturing and construction sector) as it perhaps grows too fast.
  2. Subdued global commodity prices with China slow down: Russia and Brazil most affected, being the largest commodity producers. But India may be a net beneficiary of that and that should be visible in the next few months.
  3. Uncertainty about Fed rate hike.
Now, Brazil seems to be in serious crisis with its political and economic challenges. China's financial market is not so matured enough and it will take some time to stabilize. Also, China has various financial tools in its kitty to combat the so called "slow down".

India has great opportunity to attract huge FDI in different sectors, if it is able to act fast and in a more proactive serious way. Only "Sell India" theme will not work !! 

Govt has to belief in its own reform agenda more boldly and has to do it in any way, whatever be the political cost. Joint session of parliament to pass the important bills every three months will not be a bad idea !!

By 2019, BJP should get both the parliament & RS majority of its own as there is no comparable political leader like NAMO visible in the Opp. Cong till now (RJ is not matured enough). In that sense, forthcoming Bihar election may not be a game changer, but it may be a proxy for NAMO & its policies so far.

Only then we could see a real rally in the market instead of "hope rally".    

Analytical Charts:











Sunday 27 September 2015

Ambuja Cement: 205-197 Might Be A Very Good Buying Zone

Govt's Smart City & Smart Village Theme And Infra Push May Help


CMP: 207

Buy: 205-197;

TGT1: 230-260 (15-60 days)

TGT2: 285-315 (6-12M)

TSL<189

Note: Consecutive closing below 189 for any reason, it may fall to 173-145-135 zone, where it can be again accumulated for better investment buying average.

Key Triggers:

  • Increase in cement prices and demand, specially in North/West (NW) India, where Ambuja Cement has strong presence.
  • Many more large infra projects like roads, metros, ports, airports and dedicated freight corridors are likely to come up in next few years in this NW region.
  • In the key NW market, Ambuja cement was able to increase prices substantially in the last few months, while raw material prices has come down due to depressed prices in commodities. This should help the company in margin expansion and improved bottom line.
  • We may also see merger of AC-Holcim-Lafrage into one single entity in the coming days, which will ensure better price discovery & other operational synergies amid less competition in India.
  • Post monsoon season, we may  see much better demand recovery.

Thus looking ahead, decreasing capacity additions and improved demand due to expected overall economic/infrastructure boom by FY-16 onward, will be beneficial for all the cement companies and Ambuja Cement may be one of them.


As par BG metrics:

Current median valuation of Ambuja Cement may be around: 220

Projected fair valuations might be around: 250-290-330 (FY:16-18)




SCRIP EPS(TTM) BV(Act)  P/E(AVG) LV SV MV 200-DEMA 10-DEMA
AMBUJACEM 7.16 65.11 30 221.80 211.92 216.86 229.02 209.08
AMBUJACEM 9.5 71.95 30 255.48 244.11 249.79 229.02 209.08
AMBUJACEM 12.75 79.55 30 295.97 282.80 289.38 229.02 209.08
AMBUJACEM 16.35 88.95 30 335.16 320.24 327.70 229.02 209.08







 

Saturday 26 September 2015

Motherson Sumi: "Making Too Much Out Of Volkswagen Issue" ?

Another Case of "Buying A Good Business In Distress/Unusual Condition" ??


CMP: 250

Buy on dips:225-217

TGT1: 295-335 (1-6M)

TGT2: 395-435 (12-24M)

TSL<210

Note: Consecutive closing below 210 for any reason/adverse news-flow, MSS can fall to 200-190 or even 175-160 zone, where it may be again accumulated for better investment buying average.

Some of the near terms headwinds:

VWG Issue: This issue of "Emission Software Fudging" in a diesel vehicle model in US-VWG is perhaps blown out of proportion with MSS. Although on a consolidated basis gross revenue from VWG group is around 44%, its around 12% on a standalone basis. Audi is the largest OEM of MSS at around 22% and rests are more or less spread over other notable auto makers in India and other parts of the world (EU/US).

Being the 2-nd largest OEM supplier to VWG, no doubt such negative news-flow definitely affect MSS and the stock price also tumbled by nearly 20% in the last few days after the VWG news broke out. 
This VWG issue is of engine emission software components  as disclosed by the company itself (in one of its diesel model). This issue is not related to the overall quality and customer trust, VWG enjoyed globally. Again, sales of VWG is not significant in North America (NA) and this is not a recall issue with defective auto parts. VWG will simply recall the affected models and replace that emission software or the electronic circuit free of cost.
MSS do not supply any engine components to VWG, it only supplied some exterior & interior auto accessories like mirrors,dash board, bumpers and door trims and that too is covered with adequate insurance for any unforeseen events.

As par the MSS management the VWG reaction is "over exaggeration"  and the company sees no significant impact on its total revenue as it supplies more in EU than in US/NA.  

As an auto maker, VWG is running normally, even in US as only one specific diesel variant is involved in that issue. "Auto recall" is very normal in any part of the world including US, where regulation is more stringent.

VWG has already provisioned around $4.5 bln for likely fine/replacement costs in US against the expectations of around $18 bln as par reports. 

The new CEO (Ex Porsche chief) has also a very tough job in restoring the image & trust of the company as the investigations against such issue are spreading all over the world including India. All the other automakers can also be asked to clarify and investigated for similar issue.

Although the US EPA (environmental protection agency) still maintains that the affected diesel cars of VWG is still safe to drive there (as its simply an pollution issue) they have 
not issued total recall yet, but likely to do that in the coming weeks after full investigations are completed. 
 
Having said all the above, ultimately VWG will likely be let off with a reasonable fine which the company is well capable of absorbing. In US, previously, another prominent auto maker GM faced similar regulatory issues and were let off with a reasonable fine also.

In effect, VWG as a group will not be affected significantly simply because of employment issues both in US & EU. 

Also, auto makers in US are traditionally "good fund contributors" to main stream political parties and keeping in mind, the forthcoming 2016 presidential election campaign there, we might see that nothing "unusual" will happen and normal "business" will go on for VWG also.

MSS is also targeting to diversify its business among other auto makers in different parts of the world, so that maximum 15% dependency will be there either by company/region wise by 2020. 

There are also some other factors which contributed some earning downgrades for MSS:

Credit Suisse (CS) has downgraded the stock recently citing subdued copper price and over reliance on single customer (Maruti) in India. 

As par CS, performance of auto ancillaries is directly co-related with copper and with the falling prices of the same, the company also has to pass the cost benefits to its customers and that is hurting its pricing power. That's why CS has cut the FY17 earning by more than 10% (street consensus).


Having said that, we have to keep in mind also that although commodity super bull cycle may be over, with the the recent low along with China jitters and their various initiatives to stimulate their economy, all commodities and specially copper might be in the process of bottoming out. 

Going ahead, we may see less capacity additions (supply) and stable demand, which will improve demand supply metrics.

Looking ahead: 

Going by the time & price action of MSS scrip, all the above bad news might be discounted largely. The stock may further react over the investigations of VWG issues in other countries. but that will be limited.
 The stock has cracked nearly 40% from its cyclical high on the back of this VWG issue and its poor/below estimate Q1FY16 result. 

The main reasons prior to the VWG issue are poor domestic performance and narrow operating margins. Also its overseas operations was affected due to forex volatility and China jitters and Brazil slowdown.

Looking ahead, new JV in EU & China may be the triggers for MSS along with growing market in US as "VWG's pain might turned into gains for some other auto maker's also".

Also, domestic auto industry will gain momentum in the coming days because of festival season and implementation of 7-th pay commission by Jan'16.
 MSS's strong order book, continued debt reduction plan and improvement in subsidiary synergy & profitability along with management's long term strategy of reducing dependency on a single company/country may be some of the triggers in the coming days.   

Valuations of MSS as par BG metrics: In the current market parameters

Current median valuation may be around: 295

Projected fair valuations might be around: 360-435-515 (FY:16-18)





SCRIP EPS(TTM) BV(Act)  P/E(AVG) LV SV MV 200-DEMA 10-DEMA
MOTHERSUMI 7.29 25.05 45 290.41 295.63 293.02 257.08 266.41


MOTHERSUMI 10.75 27.75 45 352.65 358.99 355.82 257.08 266.41

MOTHERSUMI 15.65 30.3 45 425.50 433.15 429.32 257.08 266.41

MOTHERSUMI 21.95 33.45 45 503.92 512.98 508.45 257.08 266.41


Analytical Charts: