Month: October 2020

Market has been rising for last 6-7 months relentlessly. Everybody is looking at next break out. People have almost forgotten about the sector, industry dynamics, business, how it is positioned in real life. But as we all know things rarely remain as they are. It was true in March 2020 when market was falling like it will go below zero. At least that is what people believed back then. Now people have forgotten that market falls too. But they can not continue to rise just like they could not continue to fall in March 2020.

At the outset let us make it clear that we are not really competent in commenting about the Index direction and so on. Few weeks back we were expecting more than 500 points fall in Nifty which did not materialize. One of the BNP Pro member in fact asked if he should sell all the stocks and buy them later when market falls but we clarified that nobody knows beyond a point what may happen in market. So do not sell but buying you can postpone and start getting out of weak hands and raise it as cash or put in strong hands. That fall never came. So if he had sold it would have been bad decision.

Anyway, let’s look at the chart of Nifty now.

In 2019 things were initially very optimistic and people were expecting upheaval due to impending election in April – May. What they were missing was just two months back in Oct 2018 market had corrected sharply to 10000 from 11700+ level and now it was time to rebound. And that is what market did. But right after results came in May 2019 and they were very clear who India wanted to lead the country people started building stories of various kind for bullish case. But market did opposite. It sold off from 12100+ level starting at July 2019. And went as low as 10600+ around Sep 2019.

After that market started rising again and as you can see market made high of 12300+ and that was Jan 2020.

Corona news started coming in and market became nervous and for a while people were taking it lightly like we earlier had SARS and how it did not matter back then and corona will be similar and what not. But come Feb 2020 and things started looking pretty grim. And market started falling like world is ending and there was mayhem in March 2020.

But guess what world can end only once and if that happens it won’t matter where market is so when market is acting like that we may nibble in because world is not actually going to end. Problem with this is you will never know if market is done with acting like world is ending or if there is more to it. So this nibbling in is easier said than done.

There were numerous comments by various market participants. Fundamental investors and value investors started by calling for ban on short selling and then went as far as asking to shut down the market and started taking support for this from some countries actually doing that. And then there were TAs saying Nifty will be soon at 4500, Bajaj Finance at 500 and so on. There was more realistic level for Nifty which as you can see on chart is third horizontal line around 8000 and once that broke TAs were looking at 6800+ which was Feb 2016 low. Of course it never came to that. And market on 23 March made bottom at 7500+ right when worst possible news came – nation wide lockdown and economy came to a grinding halt all of a sudden. Technically if you see 6800 was logical level for Nifty to find support because this is where Bull Run started in 2014 and this is where market found support last time in Feb 2016. But it did not happen. Which teaches us another lesson.

Market acts to put maximum number of people at maximum unease most of the time.

So if you see everybody is relaxed and market direction is taken for granted like it will continue to fall or continue to rise kind then you should take that as red flag. Market often changes the course at these points.

Fast forward and we reach to end of Oct 2020. Nifty has recently made high of 12000+.

Question: What is most likely? Nifty crossing its pre corona high and touching 13000 or going back to 9000?

To us it looks like it will be later – 9000 is coming before we ready for 13000.

Last 6-7 months have been very good for all and people have started taking it for granted. Looks like we are heading towards 9000 in near term. Markets are priced to perfection at this point. One bad news but nobody knows what it could be but even small bad news will mean too much for market and it will start correcting. Almost similar movie played out in 2019 for India around election result. If something similar plays out in US market due to election then likely it will have wider impact and Indian market will fall too. But this is just conjecture and does not mean much.

Why 9000? Not very scientific reason as such but this is high of Feb 2015 and Sep 2016. Looks solid to act as support. But as we earlier said once market start falling everybody will quickly realize 9000 is support which will likely negate this so we may see some correction beyond 9000 too. May be it could be as much as 8000? May be but can not say anything now. But certainly we are unlikely to breach 23 March 2020 level on downside simply because we are not going to see such a strong and compacted news flow which is so negative as was the case in March 2020 due to corona. Ask yourself if market corrects big time then will it matter whether it went to as low as 9000 or 8000? To us it looks like direction is materially more important and rest we can take it as it comes.

In Summary, we are likely to see Nifty at 9000 before 13000 comes. Even 9000 may not be respected and it may go down further to 8000 but we are unlikely to breach 7500. That is the thesis.

Now let’s assume all of that is divinely perfect and we know beforehand this is what will happen then what should we do sitting here at this point in time?

Here is 5 point action plan for this –

1. Stop buying anything new.
2. Be very selective in adding anything more.
3. Start getting out of weak positions and they could be weak for whatever reason. You decide. Raise cash or go in safe heavens at very attractive price. Prefer raising cash.
4. Keep raising cash and soon others will come to realization that market has changed the direction. We will by that time be out of almost all the positions barring something like Reliance may be.
5. We will wait for 9000 or so and then start looking very closely at individual stocks and build it back from there.

We are not going to wait for SLs to be hit to exit because that would mean giving up gains and some of our own money. Trail even the positions where you made big money and have some rule like 10% fall and you will exit or 15% or whatever you feel is suitable.

Together we can possibly come up with much better way to handle this and we can learn from each other’s experience.

Let us know what you think about it and how do you plan to manage things going ahead.

Disclaimer: Posts on the platforms of BN are our perspective on the market. These are purely meant for learning purposes. The perspective provided should not be construed as investment advice or solicitation to trade. We may have positions in the stock mentioned. You agree to make no trade relying on the above contained information fully or partly. By using the content, you agree to these T&Cs.

Pharma has been the flavour of the market moves right after the last week of March 2020. There were talks of global supply chain derisking itself from enormous risk due to unsustainable dependence on China. Indian Pharma listed space started buzzing after 5 years of clear downtrend. There were businesses which doubled the topline and PE shrink to great extent and all of these stocks started firing.

One of the stock that caught our eyes early on was Alembic Pharma.

In last 5 years Alembic Pharma has:
– 3X profits
– PE drops from 50 in 2015 to 17 at CMP of 760. This is after sharp run in last 2 days resulting in 20%+ upmove.

That was on 25th April.

Now let’s look at the chart –

On Apr 23, it crossed the Corona Top and within a month went as high as 900. A sharp move. After that stock consolidated and in July upmove resumed and stock crossed 1100 but could not sustain.

Since then stock has been in two minds and it could not rally and what is even more astonishing is that company is posting blockbuster results and PE is near 18 only.

Then question is if everything is right then why stock is not making move? Why market is not enthused about it anymore? Granted not all pharma stocks running but this has corrected and has been in range for quite sometime even with great growth in the business.

For FY21 company has guided for 60 Rs EPS and on lower side with 20 PE that translates to 1200 for a share. But there is but management has said that even with massive capex they will be doing 50 Rs EPS in FY22. Net Profits degrowing by 17-18% that is what management has guided for FY22 as compared to FY21. That is why market was not really enthused about it in short term. Another thing is promoters selling it to buy more of Alembic Ltd. That has created massive selling pressure which buying is not able to handle and move the prices up.

Does that change anything for the stock in medium term or more? No.
Does that change anything for other group companies? No, but evaluate them on individual basis.

Now stock may run towards 1100 and return from there again facing the resistance of previous ATH. Looks wise to get out from this one around 1100 and if Alembic Ltd is available near 100 then that can be looked at. Otherwise look at other opportunities. This view is strictly for short term. Because if somebody says this business is great, management is top quality and stock will do great in 5 years then we will say remind us again at the end of 4th year till then we are happy to be in the other stocks which are performing.

Do you hold Alembic Pharma? If yes then how are you going to manage the trade given this perspective?

Do let us know what you think about this in comment section.