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Stocks Corner: What to BUY, what to SELL!

Last updated on: February 4, 2013 18:19 IST

Stocks Corner: What to BUY, what to SELL!

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We asked readers to mail their queries about stocks they want to buy, sell or hold. Here's the response to their queries.

Narendar Lokwani of StockFundoo advises about good, bad and ugly stocks.

You can mail your queries to stockfundoo@rediffmail.com.

Can you please cover basics of credit policy, inflation, GDP and their effect on market in your future posts? Now-a-days repo rate, CRR, inflation all are in news but since I am not from a finance background it is difficult for me to understand the effects of cuts and why market goes up or down because of it?

Which stocks to invest and which stocks to not when all these changes take place? I think there would be many investors like me who find difficult in relate all these with investment and market trends.

The basic concept of the banking system is very simple and at its core, a bank simply accepts deposits from customers and uses these deposits to provide loans to other customers. The profitability of bank simply depends on the net interest margin, popularly called NIM, i.e. the difference between interest it charges to borrowers and interest it offers to a depositor.

A depositor might be receiving 6 per cent per annum on its savings account and bank will use this money to lend to a home loan customer at 9.5 per cent. This margin of 3.5 per cent is what is known as net interest margin or NIM for the bank.

Now, banking being such a lucrative business, everyone would want to open a bank. So RBI regulates the licenses and does not allow unregulated mushrooming of banks which might fleece customers and run away with their savings.

Another risk is that banks might take your deposits and lend it all to companies like Kingfisher Airlines which will not be able to refund the loans. So to regulate the banking sector, RBI comes up with a set of ratios like SLR and CRR.

SLR stands for statutory liquidity ratio. This term indicates the minimum percentage of deposits that the bank has to maintain in the form of liquid and safe components such as gold, cash and other approved securities. This ensures that bank remains liquid and does not fail when there are large withdrawals and does not run out of cash.

The SLR ratio currently is at 23 per cent, which is a decently high number.

CRR is cash reserve ratio and banks in India are required to park a portion of their deposits with RBI in the form of cash. This is to ensure that banks do not go overboard and lend with high leverage with no safety net behind them.

The CRR ratio is also a tool in RBI's hand to control the liquidity in overall Indian economy. Current CRR ratio is at 4 per cent and was reduced by 0.25 per cent recently. A cut of 0.25 per cent would increase the liquidity by Rs 18,000 crore in the Indian banking system.

Repo rate is the rate at which RBI lends money to banks and reverse repo is the rate at which banks park their money with RBI. This is currently at 7.75 per cent and 6.75 per cent respectively.

The economic outlook for next one year is that rate cut cycle has begun and RBI would continue slow cut in rates throughout the year. What it means for the overall economy is that, Industries and sectors that have borrowed from banks would have to pay less interest rate going forward and they would be profitable. Non-performing assets (NPAs) of banks would reduce as well. Common man would also benefit as his home loan and car loan rates would come down and he would be motivated to use his additional savings in making other purchases, thus helping economic growth in general.

So sectors like real estate, infrastructure, retail, and debt-laden sectors like textiles, sugar, manufacturing industries would benefit from this rate cut cycle. Overall, this is a positive development for Indian equity and bond markets.

Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.

Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

StockFundoo.com provides insightful and in-depth capital markets analysis. Powered by fundamental deep value investing and technical analysis, we offer detailed stock analysis updated on a daily basis.


Photographs: Rediff Archives

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Stocks Corner: What to BUY, what to SELL!

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I have 91 shares of Reliance Power at an average price Rs 311.80. Now the current price of this share is Rs 95. What do I do with this share - HOLD or SELL?

Reliance Power had a strong December '12 quarterly result recently with 30 per cent growth in net profit v/s Rs 204 crore in the same period in the previous year. Revenues also doubled to Rs 1,586 crore from Rs 674 crore in the same period.

Several of their large projects like 1,200 MW Rosa power plant and 40 MW Dhursar solar photovoltaic plant in Rajasthan are generating record power output and another large project 3,960 MW Sasan Mega Power Project is getting ready to be commissioned.

Other projects like 100 MW concentrated solar power (CSP) project in Dhursar, Rajasthan, and 45 MW wind project in Maharashtra will be in action in next few quarters, generating more revenues for the firm.

However, Reliance Power has recently seen negative news flow that Goa government is considering stopping power purchase from them on account of higher tariffs charged by RPower. The average cost of power is Rs 12.74 per unit charged to Goa government. RPower Goa Plant could shut down after government stops buying power from them.

Another thing to note is that FII holding has gone up slightly at 6.55 per cent now, which is a positive development, but promoter holding has slightly lowered at 75 per cent now from 80.4 per cent earlier.

Technically speaking, good support is at 87, and you can hold till this level is maintained. 110 is a nearby resistance level and breaking this would be tough for some time to come. However, once 110 level is broken, one can aim for 140 in next 12 months timeframe.

Since you bought at highest possible price level at Rs 311, probably in IPO days of 2008, there is very little hope for these stratospheric levels to appear again in near future. What one can possibly do is to average slightly at current levels and bring your holdings to average cost of Rs 140 and exit at cost or at slight profit when Rs 140 is seen in next 12 months.  


Image: Reliance Power's stock price movement since March 2012
Photographs: Rediff MoneyWiz

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I am holding around 2800 Raj Rayons purchased at various times. Currently the cost price is Rs 9. Where can it go in the next 1 year?

Also I want to invest Rs 2 lakh in good quality stocks, and am looking for 15 to 20 per cent returns in 1 year.

Raj Rayon seems to be an underpriced small-cap firm like most of textile firms listed in Indian markets which are having a bad run currently.

The firm is one of the leading manufacturers of Polyester Yarn in India its plants located at Silvassa, Union Territory of Dadra & Nagar Haveli.

Raj Rayons started its operations in 1993 with production capacity of 600 tons per annum (TPA) and has grown to a production capacity to 40000 tons per annum currently.

Annual revenue for RRIL is at 682 crore currently with Rs 1.51 EPS (Earnings per share). Firm has paid miniscule dividend of 3 per cent till 2011. Shareholding is consistent with promoter holding at 37.81 per cent, however public shareholding at 51.37 per cent is pretty high and becomes an issue in scrip scaling new highs. Book Value is at 41 and firm is currently trading at 80 per cent discount to its book value like most of textile firms in India.

Technically speaking, good support is at 7 and resistance levels are at 11 and 15 for this chart. 20 should be a reasonable price target in next one year or so.

On your other question, in next 1 year, emphasis would be on rate sensitive sectors as interest rates are coming down. So high beta sectors such as real estate, infra and retail should do well.

You can look at building a portfolio with 5-7 good quality mid-cap and large-cap names such as Liberty Shoes, Reliance Industries, Venky's India, Pantaloon, Shakti Pumps, Hanung Toys and Timbor Homes. 


Image: Raj Rayon's stock price movement since March 2012
Photographs: Rediff MoneyWiz

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Can you please throw some light on Gujarat Fluorochemicals (Purchase price 440 , CMP 280) & Lovable Lingerie (Purchase price 465,CMP 330). Should I hold them or switch to some other stocks? I am incurring huge losses in these two scrips. How are the fundamentals? Please suggest.

Gujarat Fluorochemicals seems to have found its support at 269, from where it has rebounded at great volumes. It might reach the near resistance levels of 314 and 371 in next few months. The worrying part of this scrip is declining revenues and profits in last few quarters. NSE also dropped this firm from F&O segment, thus putting greater pressure on the scrip.

Fundamentally, there is nothing very wrong with the firm; it's a leader in segments such as refrigerants, chemicals, PFTE and carbon credits. Promoter holding is very high at 70 per cent, which is a huge positive. Stock is trading close to its book value now and return on equity has been high at 25 per cent. All of these are positives and the firm should bounce back in next few quarters.

Loveable Lingerie is a concept stock and was in a very hot uptrend while the trend lasted. The stock started its journey at 245 and reached price levels of Rs 630 or so in a few months timeframe. The issue with this dramatic uptrend is lot of retail investors buy in at higher levels and remain stuck at these levels if the stock suddenly cools down.

Fundamentally, there is nothing wrong with this firm as well. The revenues are in uptrend and so are profits. The firm is debt-free and has provided strong profit growth and return on equity over the years. Promoters have high holding of 67 per cent which is very positive for the stock. Book Value is at 95, hence you purchased the stock at roughly 5 times book, which is obviously very expensive.

Looking at chart, support is nearby at Rs 306. This level should hold and stock may not fall below this level. Resistance levels are at 348 and 400 and you can see these levels in next few quarters.


Image: Gujarat Fluorochemicals's stock price movement since March 2012
Photographs: Rediff MoneyWiz
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Please share your view on KEMROCK INDUSTRIES AND EXPORTS.

For Kemrock, promoter ownership is only at 11 per cent now. This is typically a very negative signal for the retail investor, as if promoters do not own their company, there is little incentive for them to grow the company profitably as they don't reap the rewards. Revenues are also falling like a rock on a quarterly basis and last quarter was in deep red.

So fundamentally this scrip looks like a shaken ship to me. However, in field of composites manufacturing, this firm is a market leader in India. So this is a unique case of a good firm in deep trouble currently.

Looking at charts, technically, 54 and 67 have given support, so if someone wants to play a punt, keep a stop-loss at 67 and take a quick long. Resistance levels are at 106, so 106 might be achievable in next few months.


Image: Kemrock's stock price movement since March 2012
Photographs: Rediff MoneyWiz
Tags: Kemrock , SELL , BUY , India

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