The Professional Ticker Reader TM

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Flavours of the week                                                            July 11, 2004

The budget has changed the landscape of the Indian equity markets in more ways than one. The effects are naturally a combination of negative and positive. Reams and reams are written about the budget and we will therefore stick to the basics.

The bad news first

• The turnover tax takes the pride of place as being the most negative factor in the markets currently. It will result in drying up of volumes gradually and make the process of price discovery difficult. There will be bigger differences between bid and offer prices and therefore impact cost ( incremental difference between the first lot and the next available ) will shoot up manifold.

• There will be a lack of depth in the markets and therefore small bouts of buying or selling will result in larger price swings. Since volatility will be high, there is a risk of higher initial margins being collected by the exchanges. In the event of higher margins being levied, there maybe entry barriers to trading for a large segment of participants.

• There is a likelihood of large block deals being negotiated between institutional players in the absence of liquidity in the open markets, thereby making the markets even more skewered.

• Since jobbers, day traders and market makers will shirk away from the markets, fewer stocks will be traded and large amounts of investor wealth will be trapped in non traded scrips. Coupled with the losses suffered in the recent past, this is likely to be a major stumbling block for a retail player in the coming months.

The good news now....

• Since impact costs will be higher, there will be larger price swings. That should take cover of higher transaction costs. However, in the absence of adequate volumes would mean that traders would take smaller positions.

• The lower short term gains tax of 10 % is nothing short of a back door VDIS scheme. That should see significant amounts of money being legalised through this channel, and some portions are likely to stay in the equity markets.

• NRI investments are likely to step up in equities after the NRI bank deposit rates appear less remunerative.

• FII investment limits have been hiked, thereby giving more scope for foreign inflows into our capital markets.

• There is a scope for downward revision of the turnover tax which will give certain relief to the the trading community.

Arvind Mills - This denim / cotton textiles major is showing a classic rounding bottom ( saucer formation ) on the charts as the scrip is in a recovery mode after a prolonged fall for half a decade ( the chart below is a monthly one ). The budget has been good to the cotton textile segment and Arvind Mills is a beneficiary especially sine the export operations of the company are doing well. We recommend a long term buy on declines for the delivery investor and a option writing strategy for the income conscious investor.

Your call of action - 

• Investors / cash segment players - buy the scrip on declines upto the 65 mark and hold with a stop loss of Rs 10. Expect the counter to test the previous highs of 80 levels in a few months time. Buying should be in small lots only.

• Aggressive F&O traders - Buy the July futures only if the entire market appears strong and the same trades above the 73 mark with high volumes. Hold with a stop loss of 69 and expect a price target of 77- 78 in a bullish market in the short term. Options traders can sell the July 55 puts at a suggested premium of Rs 0.50 in small lots only.

• Derivatives contract size - Market lot = 4300, F&O margins = approx Rs 1,20,000 ( subject to change daily ).

Bank of India - this PSU banking major has slipped rapidly below it's averages and is trading at it's lowest since May ' 03. The scrip manages to continue making lower tops and bottoms formations and the short term averages have crossed the medium / long term averages in a downward direction, thereby signaling a sell on the weekly charts. We advocate a sell on advances for a speculative trader and writing calls at higher levels for the income player.

Your call of action - 

• Investors / cash segment players - exit delivery based long positions between the 50 - 55 band and convert to cash.

• Aggressive F&O traders - We advocate short selling the July futures on advances upto the 50 levels and holding with a stop loss loss at the 52.50 mark. Expect to take profits at the 45 - 46 levels in the near term. Options players may sell the July calls at 60 strike and a premium of Rs 0.60

• Derivatives contract size - Market lot = 3800 shares, F&O margins = approx Rs 44,000 ( subject to change daily ).

BPCL - after the fall of the NDA regime, the PSU disinvestment duo ( HPCL & BPCL ) have been losing their sheen rapidly. As the chart pattern below suggests, the weakness is likely to accelerate further especially if the counter trades below the 312 mark with higher volumes. We recommend this counter for short sales on advances for traders and writing calls on higher strike prices for income players.

Your call of action - 

• Investors / cash segment players - exit all long positions above the 350 mark in a bounce-back and convert to cash.

• Aggressive F&O traders - Short the July futures in a rally at a suggested level of 329 ( quoting at Rs 9 discount to cash ) with a stop loss at the 334. Expect to book profits at the 322 levels in the near term in a conducive market. Should the markets fall further, even lower levels are possible. Options players can sell the July 370 calls at a premium of Rs 2.

• Derivatives contract size - Market lot = 550 shares, F&O margins = approx Rs 44,000 ( subject to change daily ).

Glaxo - This MNC pharmaceuticals major has been often recommended by us as good buy for investors with a medium term approach to investing with a reasonably low risk appetite. The stock is a strong market out-performer and a beneficiary of the EMR regime expected to be implemented in 2005. We recommend a buy on all declines with a 6 month view. 

Your call of action - 

• Investors / cash segment players - buy the counter on all declines, especially below the 600 levels and hold with a stop loss at the 570 levels. We expect the 665 - 675 levels to be achieved in the medium term ( 6 months ).

• Aggressive F&O traders - N/a

• Derivatives contract size - N/a

Gujarat Ambuja Cements - this cement major is showing signs of consolidation at current levels and is likely to see a minor upmove if the congestion level of 288 is surpassed with high volumes in a firm market. We recommend a trading buy on the counter.

Your call of action - 

• Investors / cash segment players - buy the counter for delivery above the 288 mark and expect to book profits at the 299 / 300 mark. Hold with a stop loss at the 282 levels. Since this is a trading recommendation, we suggest trades in small lots only.

• Aggressive F&O traders - Buy the July futures only above the 284 levels and hold with a stop loss at the 281 mark. Expect to take profits at the 289 levels.

• Derivatives contract size - Market lot = 1100 shares, F&O margins = approx Rs 50,000 ( subject to change daily ).

HPCL - another mirror pattern of the BPCL story, the scrip is likely to remain subdued due to the change in stance on the disinvestment front. The stock has fallen below its short term support trendline recently and tested the May 17 lows again. The scrip is a sell on major advances and investors should liquidate their holdings and convert to cash.

Your call of action - 

• Investors / cash segment players - sell off your holdings above the 320 mark and convert to cash.

• Aggressive F&O traders - sell the July futures on advances upto 314 levels on a bounce-back and hold with a stop loss at the 321 levels. Expect to book profits at the 295 mark in the near term and possibly lower levels of 282 in a conducive market. Options players can sell the July 360 calls at a premium of Rs 1.50 in small lots.

• Derivatives contract size - Market lot = 650 shares, F&O margins = approx Rs 45,000 ( subject to change daily ).

Infosys - this software bell-weather is making a bullish pattern on the charts and is showing strength in the long term. The scrip has proven itself to be a market out-performer. The only downsides in the near term will be the increase in floating paper due to the bonus shares coming in the markets. The scrip will gain upward momentum once the 1455 levels are surpassed on a closing basis with high volumes. We recommend planning fixed income strategies on this counter.

Your call of action - 

• Investors / cash segment players - n/a.

• Aggressive F&O traders - sell the July 1200 puts at 18 premium and sell the July 1500 calls at Rs 18. If by the 29 th of July, the scrip remains between these two strike prices, this short combination strategy will yield 7.75 % return p.m.

• Derivatives contract size - Market lot = 200 shares, F&O margins = approx Rs 46,000 ( subject to change daily ).

Maruti - this counter remains our pick from the automobile stable as the upward scope remains the highest in terms of fundamentals and technicals. The scrip has surges past it's short term resistance levels of 425 and closed above it.

Your call of action - 

• Investors / cash segment players - High risk traders can buy the counter at 422 with a stop loss at the 414 levels and expect a price of 445 in the short / medium term in a conducive market.

• Aggressive F&O traders - Sell the July 350 puts at a premium of Rs 4 in minimal lots.

• Derivatives contract size - Market lot = 400 shares, F&O margins = approx Rs 49,000 ( subject to change daily ).

Shipping Corporation - this scrip is a beneficiary from the budget proposal and is showing signs of revival. Note how the pattern is that of rising tops and bottoms and and the oscillators are supporting the rally. In a conducive market, 122 - 125 levels maybe achieved in the short term.

Your call of action - 

• Investors / cash segment players - buy on declines to the 106 levels and hold with a stop loss at the 102 levels with a target price of Rs 113 in the short term and Rs 118 - 120 in the medium term.

• Aggressive F&O traders -  Buy the July futures on minor declines to the 108 levels and hold with a stop loss at the 103 levels and a profit target of 115 levels in the near term. Options traders may sell the July 90 puts at a premium of Rs 1.15 and above.

• Derivatives contract size - Market lot = 1600 shares, F&O margin = Rs 51,000 ( subject to change daily)

Tata Tele - this telecom player remains our choice from the telecom sector which has received a boost in terms of higher FDI approvals. This company is undergoing aggressive re-structuring and is likely to be a major player in the immediate future. The same is being reflected in the scrip price which is bouyant even in a choppy market. We maintain a buy on the counter. 

Your call of action - 

• Investors / cash segment players - buy the counter on all major declines upto 16 levels and hold with a stop loss at the 14 levels. Expect a price of 22 in the near term and possibly 30 and above over a years timeframe.

• Aggressive F&O traders - N/a 

• Derivatives contract size - N/a

BSE Sensex - the sensex is showing signs of strength as the rising tops and bottoms formation is intact so far. The oscillators are supporting the rally and should the index surpass the 5000 levels on a closing basis with high volumes and positive market breadth, expect a fresh 2 - 3 % upmove.

Your  call  of  action - Since the Sensex futures are not very liquid, we suggest trading  the Nifty 50  instead.

Nifty 50 - the Nifty is at a crucial threshold as the 1567 levels will be the trend determination point on an intraday basis in Monday. Over the next day, expect the 1587 levels to be the inflection point. Should the FM reduce the turnover tax substantially and the Nifty surge past the 1587 levels, expect the 1620 levels to be achieved in the near term. On the lower side, if the 1510 levels are violated, expect the next stop to be at the 1480 levels. If the turnover tax remains at 0.15 % and the 1480 is violated downwards, expect 1467 levels to be a possibility in the near term.

Your  call of  action - We advocate fresh trades on the Nifty only after Tuesday when the turnover tax issue is clarified completely.

Have a  profitable week.

 

Vijay L Bhambwani

Ceo :- Bsplindia.com

The  author is a Mumbai  based investment consultant and  invites feedback at Vijay@BSPLindia.com and  ( 022 ) 23438482 / 23400345.

SEBI  disclosure :-  The  author has no positions in any securities mentioned  above.

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