Is Infosys slowly narrowing valuation gap with TCS?

Riken Mehta
Moneycontrol Bureau 

Follow me on Twitter @mehtariken 

Most IT analysts recommend TCS over Infosys to clients looking to bet on the IT services sector. The bias is evident from the valuation (measured in terms of the trailing 12 month price earning multiple) that investors are willing to pay for TCS as opposed to Infosys. A string of depressing quarterly earnings from Infosys caused the valuation gap to widen by as much as 60 percent at one stage. That gap has been narrowing of late, despite TCS reporting a superior set of quarterly numbers. One of the explanations for this trend could be that the TCS stock is already discounting most of the positives. The earnings upgrades for Infosys post second quarter earnings could be another factor. But it could still be a long road ahead for Infosys before it manages to close the gap altogether.

Long developed market indices (US, UK, Japan), short gold is trade of 2013 so far

Riken Mehta

Follow me on Twitter @mehtariken 

Loose monetary policies by the central governments of major developed markets have made a substantial impact on various asset classes (equities, debts, commodities and currencies) around the globe this year. The major bond buying programs were aimed to kick start the struggling economy but made its way into risky assets like equities. The successful trade of 2013 so far is “long developed market equities, short bullion.”

As seen from the table, benchmark indices of US, UK and Japan have given handsome double digit returns so far this year. The momentum in these markets may continue as major indices of US (barring Nasdaq) and UK (barring CAC) are trading at life-high. Nikkei is trading close to its 5 ½ year high. Emerging markets have posted negative or single digit positive returns this year, underperforming developed markets.

Gold which was considered to be safe haven has lost its sheen (down 26%). Investors have dumped gold as US economy rebounds and the yellow metal is now trading merely 5 percent above its three-year low price touched earlier this year. Silver - more volatile than gold has lost 35% so far this year.

Developed Markets	US			UK			Japan
Indices	Dow Jones	NASDAQ	S&P 500	DAX	CAC	FTSE	Nikkei
YTD Returns%	22.59%	32.20%	26.54%	18.52%	14.59%	10.73%	43.91%

Emerging Markets	Brazil	Russia	India	China	Indonesia
Indices	Bovespa	RTS	Nifty	Shanghai	Jakarta
YTD Returns%	-13.37%	-5.37%	1.53%	-3.21%	0.03%

Bullion	Gold	Silver
YTD Returns%	-26.17%	-35.11%

How major stock markets react to news of Fed's taper talk

Riken Mehta 
moneycontrol.com 

Follow me on Twitter @mehtariken 
 
The US Federal Reserve has been the biggest spoilsport for bulls this calendar, repeatedly catching them off-guard with its comments on reducing the size of its monthly USD 85 billion bond purchases, also known as quantitative easing (QE). In theory, the bond purchases were meant to revive growth in the US economy by encouraging consumption and investment through easy money. In practice, huge dollops of those funds found their way equities and bonds in other countries, boosting their valuations. With a prospect of less global liquidity looming, investors are worried if the valuations can sustain.

A look at the timeline of the taper remarks and how key markets reacted to those.

Dates	Dow	Hang Seng	Nikkei	Shanghai
22-May	15307 (dn 0.5%)	22669 (dn 2.5%)	14483 (dn 7.3%)	2275 (dn 1.1%)
19-Jun	15112 (dn 1.3%)	20382 (dn 2.87%)	13014 (dn 1.74%)	2084 (dn 2.7%)
18-Sep	15676 (up 0.94%)	23502 (up 1.66%)	14766 (up 1.8%)	2221 (up 1.36%)
20-Nov	15900 (dn 0.41%)	23580 (dn 0.5%)	15365 (up 1.92%)	2205.77 (dn 0.04%)

May 22, 2013: Bernanke tells Congress Fed may reduce size of month bond purchases (QE) June 19, 2013: Bernanke says Fed will begin QE taper late 2013 and end it by mid 2014 if economy revives September 18, 2013: Fed says economy not strong enough, will continue with QE November 20, 2013: FOMC minutes suggest that taper will begin shortly.

Barring Dow, all markets reacted to Bernanke comments on the next trading day. So values are of the next trading day.

Nifty

May 22 2013: Nifty closed at 5967, lost 127 pts in next trading session post Bernanke comments. Rupee was at 55.585, depreciated 0.2%.

Between May 22 and June 19, Nifty made a low of 5683 while Rupee depreciated 5.8% in the same period.

June 19 2013: Nifty closed at 5655, lost 167 pts or 2.86% in next trading session post Bernanke hinting at QE tapering in next meet. Rupee closed at 59.575, depreciated 1.46%. Between June 19 and Sep 18, Nifty made a low of 5118 (down 16% since Fed first mentioned tapering of QE on May 22), while rupee depreciated to 68.84 (rupee lost 24%) on account of heavy unwinding by FIIs.

Between May 22 and Sep 18, FIIs sold equities worth close to Rs 11500 crore.

September 18 2013: Nifty closed at 6115, gained 216 pts or 3.6% post Fed deciding not to taper QE. Rupee was at 61.775, appreciated 2.54%. Between September 18 and Nov 20, Nifty made a high of 6342, rupee appreciated to 61.01 on account of continuous buying by FIIs. FIIs bought equities worth close to Rs 28800 crore in the same period.

November 20, 2013: Nifty closed at 5999, lost 120 pts or 2% post fears of tapering.

Why it is critical for Nifty to close above 6300 on consistent basis

Riken Mehta 

Follow me on Twitter @mehtariken 

Nifty has crossed 6300 twelve times intra-day in last six years (Four times each in 2008, 2010 and 2013) but managed to close above 6300 only on four occasions.

Below is the table of number days Nifty closed in that range in a particular year

Year	2008	2009	2010	2011	2012	2013	Total
Above 6300	0	0	2	0	0	2	4 days
6000-6300	11	0	40	4	0	62	117 days
5000-6000	48	42	179	193	215	154	831 days
4000-5000	119	114	31	50	36	0	350 days
3000-4000	30	35	0	0	0	0	65 days
2000-3000	38	52	0	0	0	0	90 days
Year range	2524-6288	2573-5201	4718-6312	4544-6157	4637-5930	5285-6317

In 2008 (Nifty made an all-time high but failed to close above 6300)

Nifty touched an all-time high of 6357 on 8-Jan-2008 but closed below 6300 on the very same day. Nifty also touched a low of 2252 in the same year and closed at 2524. Year range (close price): 2524-6288

In 2010 (Nifty made double top around 6300)

Nifty closed above 6300 on couple of days but failed to record a new all-time high and retraced back from 6300 levels to 5752. Nifty also closed in the range of 6000-6300 for 40 days unlike in 2008 (only 11 days). Year range: 4719-6312

In 2013 (Triple top??)

Nifty again closed above 6300 on couple of days but failed to record a new all-time high and is now below 6000. However, the key positive in 2013 (unlike in 2008 and 2010) is that Nifty has closed in 6000-6300 range for 62 days in 2013 which is more than cumulative days of 2008-2012 (55 days) for the same range. Also Nifty has made a good base in the 5000-6000 range. So, it mayl be too early to say that Nifty has made a triple top but for the Nifty to record a new all-time high and rally beyond it, it will need to close consistently above 6300. Year range: 5285-6317

How to trade when rupee falls: Long IT, Short Nifty, Bank Nifty

Riken Mehta 

moneycontrol.com

Follow me on Twitter @mehtariken 

Major asset classes like equities, currencies, commodities and bonds have seen huge volatility in the last six months on speculation over the pace of the US Fed’s bond purchases. Fears of a reduction in monetary stimulus have been putting pressure on the rupee and equities. However, some traders have used these sharp moves to their advantage. One such strategy has been to go long on IT stocks and short the Nifty and Bank Nifty stocks.

In past six months, every time the rupee has depreciated more than three percent, Nifty has lost two percent while Bank Nifty has shed close to four percent in trade. Barring one instance, CNX IT has given positive returns.

Instances when rupee has fallen more than 3% in short duration (3-8 days) Period: 11-May-2013-12 Nov-2013. Rupee data source: Bloomberg

Days	Rupee	NIFTY	BANK NIFTY	CNX IT
June 5-11 (5 days)	-3.45%	-2.21%	-3.71%	0.54%
Jun 17-26 (8 days)	-5.58%	-3.79%	-7.18%	0.13%
Jul 29-Aug 2 (5 days)	-3.47%	-2.67%	-4.47%	2.54%
Aug 14-22 (6 days)	-5.60%	-5.11%	-7.18%	-2.49%
Aug 26-28 (3 days)	-8.63%	-3.40%	-7.50%	3.57%
Nov 5-12 (6 days)	-3.20%	-4.73%	-8.88%	1.03%

Who 'really' gained from petrol deregulation?

Riken Mehta

Follow me on Twitter @mehtariken 

Petrol prices were deregulated by the government on June 25, 2010 in an attempt to cut down the fuel subsidies and reduce the burden on upstream and downstream companies.  Crude import bill forms a major part of the CAD and fewer subsidies would also allow the government to spend more thereby propelling the growth of the economy. However, nothing has worked as per the UPA government’s expectation.

The burden of upstream companies like ONGC, Oil India and Gail have doubled so far since deregulation on higher under-recoveries and would soon become cash-strapped if things remain constant.

Downstream companies have not been able to pass on the complete hike of petrol and diesel to consumers despite diesel being deregulated in January this year by the government. Also, delay in receiving fuel subsidies led to heavy borrowing by OMCs to meet their working capital requirements. Barring BPCL which has exploration assets, these companies have not rewarded their shareholders who invested on hopes of turnaround since deregulation.

Brent crude has surged 33 percent while rupee has depreciated 34 percent since petrol deregulation. The consumers are now shelling out 50 percent more for petrol and diesel. Sales of auto companies also took a hit as the price differential between petrol and diesel has come down significantly. And it can’t get better with the timing of IOC FPO thereby forcing the government to give subsidies in the middle of the year to repair oil marketing company’s balance sheet.

* From 25-Jun-2010 to 31-Dec-2010

Particulars	On 25-Jun-2010	2010*	CY2011	CY2012	CY2013	Since 25-Jun-10
Avg Petrol (Rs/ltr)	52.2	56.51	69.52	74.6	75.97	50%
Avg Diesel (Rs/ltr)	39.88	47.77	44.98	47.84	56.56	50%
Avg Brent Crude (USD/bbl)	78.12	82.04	110.91	111.68	108.31	33%
Avg USDINR rate	46.54	45.7	46.67	53.49	57.99	-34%
Under Recovery (Rs Cr)		78190 (FY11)	1,38,541 (FY12)	1,61,029 (FY13)	60907 (H1FY14)	Over 4 lakh crore
Upstream burden		30297 (FY11)	55000 (FY12)	60000 (FY13)
BPCL	310.68	6%	-27%	49%	0%	15%
HPCL	401.05	-3%	-36%	15%	-26%	-46%
IOC	377.3	-10%	-26%	6%	-22%	-44%
ONGC	316	2%	-21%	4%	6%	-10%
Oil India	544.08	3%	-15%	-2%	0%	-14%
GAIL	482.75	6%	-25%	-7%	-4%	-29%