India Stock Market – Monthly Review for August 2007

Indices witness non stop rally; The India Street Analysis proved right!

By Sundaramurthy Vadivelu

Disclosure

A couple of weeks ago, there were some ‘worries’ about how Indian stock market is likely to perform in the near future. Reasons cited were:

• US Sub-prime mortgage crisis may have ‘continued to effect’ Indian stock markets;

• The appreciating Japanese Yen may have made the hedge funds to offload their holdings in emerging markets;

• Possible political uncertainty may ‘worry’ the markets.

In the last week’s review, we had indicated that the indices appeared to have bottomed out. We gave 3 reasons to believe so.

• Solid buying support came in after every fall

• A bullish ‘harami’ candlestick pattern in weekly chart with medium reliability

• Decreasing price and open interest in August contracts of Nifty futures

Those who were skeptical about Technical Analysis may have found out what exactly was reality.

Indeed, the indices DID bottom out. This week, the Nifty gained 273.85 points or 6.54% on a weekly close basis. In the last one year, it gained 5% or more only once during the week ended March 23, 2007. This week’s gain is only 7th such occasion in the last 3 years. That way, this week has been quite a remarkable turnaround in Indian stock markets.

The following table summarizes the daily gains of Nifty during the week.

Date	Points Gained	% Gain
27-Aug-07	112.45	2.68
28-Aug-07	18.10	0.42
29-Aug-07	38.60	0.89
30-Aug-07	53.00	1.22
31-Aug-07	51.70	1.17

It can be seen that Nifty didn’t lose a single point throughout this week.

Let’s now discuss the daily chart of Nifty.

http://groups.google.com/group/theindiastreet/web/NIFTY_DAILY_310807.jpg

The index has completed one full Elliott wave cycle as can be seen from the above chart. Waves 1 – 5 and a – c are already over. To begin a fresh cycle, the index needs to make a higher high and a higher low.

In the chart shown below, Fibonacci retracements are displayed. Nifty has successfully closed above 4401 i.e. 61.8% retracement which is the technical recovery target.

On August 27, a “Three outside up” pattern was formed in the daily chart of Nifty. Though the shadows of red candle were not engulfed by the shadows of the green candle, it is still a pattern with a lesser reliability. The green candle on Monday had a partial upward gap and this confirmed the engulfing pattern formation.

http://groups.google.com/group/theindiastreet/web/NIFTY_FIBO_310807.jpg

In the weekly chart, a bullish “Three inside up” pattern has been formed as shown below.

http://groups.google.com/group/theindiastreet/web/NIFTY_W_M_310807.jpg

The bullish pattern in weekly chart confirms the reversal. But in monthly chart, a bearish “Harami” pattern has been formed. Watch the long lower shadow. This is an indication of the lower side volatility. Previously, a bearish “Engulfing” pattern was formed as shown. But these two candlestick patterns need confirmation on the third period (day, week or month). Without confirmation, the patterns are insignificant.

Forecast for the next week:

Now that we have confirmation of reversal in short and medium term charts, we need to look for the formation of first wave in daily chart i.e. a higher high and a higher low. The index is likely to face resistance at 4530 and ideally, a close above 4530 will complete the formation of first wave.

Even if that does not happen, 38.2% and 61.8% retracement levels should hold. Considering a low of 4002 and a high of 4471 these levels work out to 4293 and 4183 respectively. So, if a correction in the index starts straightaway next week (since the index gained for six consecutive days in a row) these are the two levels to watch out for. A reversal should occur after any of these retracements are breached.

We still remain positive on Indian stock market. Any decline in the index next week will only be an opportunity to enter the Nifty futures.

Futures & Options Market:

http://groups.google.com/group/theindiastreet/web/NF_SEP_310807.jpg

It can be seen that the price and open interest are increasing for the September contracts for Nifty futures. This again, is a bullish sign, meaning more buyers enter the market as price increases.

IPO Update:

The India Street analyzed Puravankara Projects Limited IPO. Its issue price was Rs.400. It got listed on August 30. It opened with a negative premium of Rs.90 at Rs.310 and closed at Rs.362.30. However, today it gained slightly to close at Rs.377.05.

For the top 10 gainers and losers in the overall market for this month please read my earlier article, “India’s hottest stocks for August 2007”.

The top 5 gainers and losers for the month among index stocks are given below.

Scrip	% Gain	Scrip	% Loss
SAIL	12.01	CIPLA	12.75
BHEL	9.29	VSNL	12.01
TATASTEEL	5.10	HINDPETRO	8.79
RPL	3.63	GAIL	8.38
RELIANCE	3.56	TCS	7.95

The India Street analyzed BHEL in “Stock of the week: Bharat Heavy Electricals Limited” and VSNL in “Stock of the week: Videsh Sanchar Nigam Limited VSNL”. We discussed about CIPLA in my previous article, “5 More Stocks to Avoid in the Short Term”.

Our long term pick Nagarjuna Fertilizers Limited gained 72.49% this month. Our short term pick Tata Sponge Iron Limited gained 20.84% this month.

Sundaramurthy Vadivelu

Suggested Reading

India Stock Market – July Monthly Review India Stock Market – Weekly Review Indices appear to have bottomed out! How will the US sub-prime mortgage crisis effect the Indian stock markets? India’s hottest stocks for August 2007 Stock of the week: Bharat Heavy Electricals Limited

Stock of the week: Videsh Sanchar Nigam Limited VSNL

Disclosure

The India Street Analysis

Videsh Sanchar Nigam Limited (VSNL) is India’s leading provider of International Long Distance (ILD) services and Internet services (Hindi: Videsh = Foreign Country; Sanchar = Communication; Nigam = Corporation).

Until the opening up of Indian telecom industry to private players, VSNL was the sole provider of ILD services.

Brief history of the company:

In 1932, Indian Radio and Cable Communications Company (IRCC) was formed by merging The Eastern Telegraph Company (established in 1872) and the Indian Radio Telegraph Company (established 1927). Soon after the independence in 1947, Indian government took over IRCC and made it a separate department (Overseas Communication Services). VSNL was incorporated in 1986 to look after the activities of this department.

In 2002 the Indian government divested about 25% stake in VSNL and the Tata Group acquired about 45% stake in it. As of June 2007, Government of India holds 26.12%, Tata Group 50.11%, Institutional investors 14.86%, corporate bodies 0.54%, individual retail investors 2.86%. 6.05% stake is held by custodians against which depository receipts have been issued.

Business Profile:

VSNL offers the following solutions for home and personal use:

• Dial-Up Internet access

• Broadband Internet access

• Net telephony

• E-mail services

• International Calling Cards

• Web site hosting services

• Wi-Fi services

These are marketed under the brand name ‘Tata Indicom’

VSNL’s corporate solutions are given below.

• International Private Leased Circuit Service

• National Private Leased Circuit

• Internet Leased Line Service

• Bandwidth on Demand

• Managed Data Network Service

• Virtual Private Network Service

• Inmarsat (International Maritime Satellite Organisation): operation of geo-stationary satellites designed to extend phone, fax and data communications all over the world

• Providing satellite television uplinking and broadcasting facilities to many television channels

• Data Centre Services

• Video Conferencing

• Corporate Net Telephony

• Integrated Services Digital Network (ISDN)

• Corporate Dial-Up solutions

• Business messaging and collaboration services

• Ethernet Wide Area Network (WAN) services

In 2004, VSNL acquired Dishnet DSL, a Chennai based Internet Service Provider belonging to Sterling Infotec group. The acquisition helped VSNL consolidate its presence in Internet business under the Tata Indicom brand name.

Of late, other basic telephone service providers like BSNL (Bharat Sanchar Nigam Limited), MTNL (Mahanagar Telephone Nigam Limited, Delhi & Mumbai), Reliance and Bharti Airtel provide ILD services as well as broadband/dial up internet access.

VSNL is one of the 11 Indian companies listed at NYSE. In India, it is a constituent of BSE-100/TECK Index and also Nifty. At NSE it has a market capitalization of Rs.13030 crores and weightage of 0.55% in Nifty.

Over the last two financial years, VSNL has declared nearly consistent net profits of Rs.480 crores and Rs.469 crores. It has an EPS of nearly 16.4.

With the arrival of new players in Internet services industry, VSNL faces stiff competition. BSNL, MTNL and Bharti Airtel provide voice solutions (local/national/international) along with broadband connectivity through underground copper cables. Tata Indicom has also started providing wireline phones/broadband access to homes, but only at Ahmedabad, Bangalore, Delhi and Hyderabad. At some places, VSNL’s cables pass overhead; this sometimes leads to disruptions in internet services.

Only 14% of the users at www.mouthshut.com have recommended Tata Indicom’s internet services. Please read more here.

Performance in stock market:

In the monthly chart shown below, it can be seen that during the dot.com boom the stock reached a high of 3250 during February 2000. But within about 8 months it collapsed to 211. So, even fundamentally good stocks can be affected badly in certain situations. (Chart courtesy: BSE web site www.bseindia.com)

http://groups.google.com/group/theindiastreet/web/VSNL_M_BSE.JPG

Obviously it may not be possible to reach a price of around 3000+ from the current levels of 420 even in the long term. Let us now discuss the medium term trend of the stock using the weekly chart.

http://groups.google.com/group/theindiastreet/web/VSNL_W_NSE.JPG

There is strong resistance at 515.80 in the weekly chart of the stock. One can also spot the “Double Top” formation at the resistance level. This indicates bearishness. The three attempts made by the stock to pierce the resistance have turned out to be futile. Importantly, the volume has gradually gone down – an indication that not too many investors are interested in the stock. But this is the case during the recent uptrend, suggesting that the trend was weak. All these factors conclude that the stock is bearish for the medium term. Unless the stock closes above 515.80 with reasonably good volumes we can’t expect much from the stock.

Conclusion:

Those who bought at reasonably lower levels may exit the stock as it is turned bearish. Fresh long positions can be initiated for medium term after confirmation of breakout on the upper side.

Sundaramurthy Vadivelu

Suggested Reading

Stock of the week: Hindustan Unilever Limited Chart Patterns and market’s reaction Video: Entertaining Look at India’s Economic History VIDEO: India vs China - Which is Better?