Is OnMobile Global for sale?

A few weeks back, there was a rumour in the market that TCS was looking at the possibility of buying OnMobile Global. That remained a rumour and did not become news. Those who may have bought the stock on the basis of the rumour may be waiting for an opportunity to sell.

That opportunity may not be far away. As per a recent article in Business India magazine, OnMobile Global is on the block and the latest suitor is Idea Cellular (of the Aditya Birla group). Apparently, Idea is ready to buy a 60% stake in the company at a price of Rs 100 – which is 33% higher than today’s closing price of Rs 74.40.

If this rumour turns out to be true, then investors may be able to pocket a neat gain if they enter at the current market price. Acquisition of a 60% stake – or even a lower stake - will trigger an open offer to existing shareholders.

In a post on the telecom sector a couple of months back, it was observed that the OnMobile stock was trying to form a bottom by consolidating within a rectangular band between 54 and 73. It was suggested that the stock could be a contrarian bet, but with a strict stop-loss at 52.

In Jan ‘12, the stock crossed above the rectangular consolidation zone, rose to an intra-day top of 84 on Feb 15 ‘12 and briefly breached its falling 200 day EMA. It has now pulled back to the top of the rectangular band. An upward bounce can be used to add/enter.

What if the rumour about Idea‘s stake buy remains a rumour – like it happened in the case of TCS? The company is fundamentally strong, and its overseas businesses, which contribute nearly half of its total revenues, are supposedly doing well. Domestic business is under pressure. Q3 results showed 12% top line growth but a 11% dip in the bottom line.

With smart phones becoming cheaper by the day and 3G service roll-outs in progress, OnMobile’s expertise in value-added software services should see growing demand. Even if the stake sale doesn’t go through, it may be worth holding on to the stock. A buy-back by the management, with a ceiling at Rs 85, is currently in progress.

Can telecem sector stocks be contrarian bets?

Not much has changed in my bearish views about the telecom sector stocks since I wrote the previous post a little over a year back. The Sensex and Nifty are in bear markets – so are most of the telecom stocks. But there are always a couple of stocks in every sector that flow against the tide. The telecom sector is no exception. But the answer to the question is: No.

The 2G scam has not yet reached a denouement, except that the former telecom minister and his cohorts are still enjoying free lunches, but behind bars. Those who bid too high in the 3G auctions tried to cut their losses by circumventing auction conditions by sharing resources. The headwinds in the sector remain strong.

Horizontal dotted lines on the two year bar charts below represent price levels at the time I wrote a bearish post back in Oct ‘09.

MTNL

The MTNL stock chart shows why the government should concentrate on making policies that enable businesses to prosper, but not be in business. A monopoly in the lucrative Delhi and Bombay markets couldn’t help the company to gain any competitive advantage. The stock is falling further in a bear market. Avoid.  

Bharti Airtel

Bharti Airtel is the leader in the telecom pack. After dropping to a low of 254 in Jun ‘10, the stock had been in an up trend that reached a peak of 445 in Aug ‘11. The bears decided enough was enough. The stock has fallen below its 200 day EMA, the blue up-trend line and is just about hanging on to the two years old price level of 359. A drop to 325 is possible. Hold.

Reliance Communications

The Reliance Communications stock has lost 75% from the two years old level of 282 to its recent low of 69 – and may drop lower. The only hope for shareholders (those poor souls who are still hanging on) is if ‘big brother’ bails out ‘little brother’. Do not touch with a 10 ft pole.

Idea Cellular

In my previous post, Idea Cellular was recommended as a contrarian play, and is the only stock to make some gains in the past two years. Though technically in a bull market, the good times seem over for now. Book profits, or hold with a strict stop-loss at 80.

Tata Teleservices (Mah.)

Tata TeleServices is at a critical support level of 14. All efforts at rallies have been met with selling by bears. If 14 is broken – and the probability is high, it may become a penny stock. Avoid.

Subex

The stock of Subex had made a good recovery and was forming the handle of a possible cup-and-handle bullish pattern. Only, the handle turned into the first leg of a down trend that has pushed the stock price deep into a bear market. The stock has lost 70% from its Nov ‘10 high of 95 to the recent low of 28. THe market has punished companies with high debt. Avoid.

OnMobile Global

The OnMobile stock has been pummeled out of shape – an example of how sentiments can play havoc with a fundamentally strong stock. For the past few months, the stock has been consolidating within a rectangular band between 54 and 73. There is a good possibility of the stock trying to form a bottom here. This can be a contrarian bet, but with a strict stop-loss at 52.

Geodesic

The Geodesic stock was a favourite of small investors in the previous bull market – thanks to the presence of the ‘RARE’ bull. But I could never figure out how they were making money (in spite of working in the IT industry for almost 30 years). The company has spun a web of subsidiary companies – many of which are located in tax havens. “Daal may zuroor kuchh kaala hai”! THe stock is falling deeper into a bear market. Stay far away.

Tanla Solutions

Tanla was falling deep inside a bear market when I looked at it a year back. The chart is an example of how a stock which has already fallen a lot can fall much further. It has become a penny stock. Avoid.

MRO-Tek

MRO Tek has also turned into a penny stock in spite of being around for more than two decades and being in the growing telecom and networking hardware business. Those who trade in this stock are either very brave or very foolish. Volumes indicate that their numbers are quite small. Don’t touch it.

Related Post

Should Indian investors switch out of Telecom Sector stocks?

Stock Chart Pattern - OnMobile Global (An Update)

The previous update of the chart pattern of OnMobile Global generated a fair amount of reader queries and comments, which implies that the stock finds a place in the portfolios of many small investors. Some bought at the IPO price of 440 during the previous bull market. Others entered at various lower levels, but have not really got much returns from the stock.

What is the reason for investor fascination with OnMobile? Is it because the company is in the high-tech field of telecomm software, and investors assumed that growth in telecomm subscribers would automatically lead to growth in the telecomm software field? Or, is it because one of the promoters is an ex-Infosys employee, and OnMobile was going to be the ‘next Infosys’?

The disappointing performance of the OnMobile stock has left many small investors bewildered. However, the company is backed by a strong balance sheet – unlike Bartronics or Cranes Software, which were also favourites of small investors. So, the likelihood of the company providing decent returns in the future is high. The overseas rollouts of the company’s software services (for Vodafone and Telefonica) have commenced. These should boost revenues and profitability.

But investors must appreciate that growth in telecomm subscribers does not necessarily translate into higher profits for telecomm software providers. The company  provides discretionary value-added services, which users may not opt for. And, the ‘next Infosys’ is a myth.

What does the 2 years bar chart pattern of OnMobile Global tell us?

The stock has been in a down trend since touching a high of 682 back in Jul ‘09. A bear market was confirmed by the ‘death cross’ (marked by blue oval) of the 50 day EMA below the 200 day EMA in Nov ‘09. A bearish pattern of lower tops and lower bottoms continues. As per Dow Theory, the down trend remains in force till it is reversed.

Note that brief moves above the falling 200 day EMA in Jan ‘10, Sep-Oct ‘10 and earlier this month were met with selling. This is typical of bear markets where one is supposed to ‘sell the rises’. The rally from the Feb ‘11 low of 181 found resistance at the long-term support/resistance level of 310 and has dropped quickly to the next support/resistance level of 255.

The announcement of the 1:1 bonus issue on Mar 7 ‘11 (record date still to be decided) has not helped the bulls to loosen the bear hug on the stock so far. Is there a possibility of a trend reversal any time soon? The positive divergences in the technical indicators seem to suggest as much. All four reached higher tops while the stock made a lower top (marked by blue arrows). The stock may also be in the process of forming an inverse head-and-shoulders reversal pattern – with the left shoulder at the Nov ‘10 low of 226; the head at the Feb ‘11 low of 181; the right shoulder is still being formed; and the neckline at the 310 level.

Announcement of the record date for the bonus issue and good Q4 results can be the catalysts for the stock to reverse the down trend. Till then, one can expect the stock to consolidate between 255-310. The near-term technical indications are weak. The MACD is positive and just above its signal line, but has reversed direction. The ROC is also positive, but has dropped below its 10 day MA. The RSI has dropped from its overbought region, but is above the 50% level. The slow stochastic touched its overbought zone, only to fall below its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is showing signs of reversing the down trend. Good volume support on up days is an indication that the bad days may be getting over. A high volume break out above 310 will be the first confirmation of a trend change, and a buying opportunity. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.