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 Index Chart Patterns – Jakarta Composite, Korea KOSPI, Taiwan TSEC – Dec 9 ‘11

Jakarta Composite Index Chart

Two weeks back, the Jakarta Composite index was under a bear attack and had slipped below the 200 day EMA. The technical indicators were looking weak and the index was expected to fall some more. But a ‘reversal day’ pattern (lower low, higher close) on Nov 25 ‘11 led to a quick rally above all three EMAs.

The rally seems to have stalled at the 3800 level. The index is technically still in a bull market, but the bulls and bears appear to be equally matched. The immediate hurdle on the upside is the Oct ‘11 top of 3875.

The slow stochastic is climbing towards its overbought zone. The MACD is above its signal line and slowly rising in positive territory. The ROC has entered the positive zone. The RSI is struggling to cross its 50% level. Expect some more sideways consolidation.

Korea KOSPI Index Chart

The Korea KOSPI index broke the bear shackles with a sharp recovery and a gap up jump above the 1900 level to the 200 day EMA, where the bears put up a stiff resistance. The index tried valiantly for a few days to climb above the long-term moving average. It finally appeared to give up the fight today, and closed below the 1900 level.

The technical indicators are showing weakening signs. The slow stochastic is inside the overbought zone. The MACD is positive and above the signal line. The ROC is also positive, but turning down. The RSI is above the 50% level, and also turning down.

The stock has failed to get out of the bear market but is trading above its 20 day and 50 day EMAs. May not be for long.

Taiwan TSEC Index Chart

The Taiwan TSEC chart looks the weakest of the three Asian indices. Though it recovered nicely from its two year low of 6751 and had a gap up jump above its falling 20 day EMA, it started correcting almost immediately and closed below the 6900 level today.

All three EMAs are falling and the TSEC is trading below them. It is likely to fall deeper into a bear market. The technical indicators are bearish. Both the slow stochastic and the RSI are below their 50% levels. The MACD is touching its signal line in negative zone. The ROC has failed to enter positive territory.

The Nov ‘11 low may be tested and broken.

Bottomline? All three Asian indices staged rallies, but with different consequences. The Jakarta Composite chart looks the strongest, as it is trading just above all three EMAs. The Korea KOSPI chart is above its 20 day and 50 day EMAs, but below the 200 day EMA. The Taiwan TSEC chart is the weakest, trading below all three EMAs in the depths of a bear market. Conserve cash and wait for lower levels to enter.

How FDI has helped 6500 farmers in Bengal

From the responses to last Thursday’s post, it is quite apparent that there are a lot of apprehensions about the benefits of FDI in multi-brand retail among educated citizens. The big show of opposition by the BJP was expected – not because they are concerned about the ‘kirana’ stores becoming defunct, but because small traders and businessmen form a big part of their vote bank. The Marxists opposed it because that gave them some thing to do. They have become irrelevant otherwise.

The timing of announcing the much-expected policy reform could have been better. With some important state elections round the corner, even ruling party stalwarts voiced their doubts. But objections from allies in the ruling coalition forced the government to back-track and postpone implementation of 51% FDI in multi-brand retail. The policy flip-flop got wide coverage in the international press and hasn’t gone down well with FIIs, who headed for the exit doors.

What got lost in the brouhaha was that there was no opposition to the announcement of 100% FDI in single-brand retail. Why? Because 51% FDI in single-brand retail was already a fait accompli. That means good news for IKEA, Rolex, Tommy Hilfiger but bad news for Tesco, Carrefour, Walmart. Instead of getting into the pros and cons of 51% FDI in multi-brand retail, let me relate what is happening to 6500 farmers of West Bengal. It was front page news in The Telegraph two days back.

There is a potato crisis in Bengal. The crop is harvested during Feb-March and kept in cold storages for selling through the year. While a third of last year’s crop is yet to be sold, bumper harvest in Punjab has led to a flood of potatoes into the state. Farmer’s prices have dropped to 90 paisa per Kg against the usual Rs 3.50 per Kg. Middlemen, who ‘buy’ from the farmers and store the crop, pay the farmers only after they sell. With prices crashing lower, they are refusing to pay the farmers at the higher rate.

But 6500 farmers in Howrah and five neighbouring districts have cocked a snook at the antics of the middlemen. All of them supply their produce to the potato-chips factory of PepsiCo in Sankrail, Howrah. This is how the system works. PepsiCo, a multinational giant, has appointed 150 registered ‘vendors’ and help them to get loans to enable them to buy seeds, pesticide and sacks for the farmers. The farmers produce special chip-grade potatoes with less sugar and water content than the local variety, for which the vendors were paid Rs 6.10 per Kg by PepsiCo in Mar ‘11. The vendors pay the farmers promptly.

The vendors’ job is to coax more farmers to join the scheme because PepsiCo plans to increase their procurement by 50% from the current 40,000 tonnes. Due to the higher rates paid by PepsiCo and the prompt payment from vendors, these 6500 farmers hope to make a profit upwards of Rs 20,000 per acre as opposed to the likely loss of Rs 10,000 per acre that farmers of local variety of potatoes may face if they get paid at 90 paisa a Kg.

The prosperity that is spreading down the chain is remarkable. Some of the farmers who joined the scheme a few years back have replaced their hutments with ‘pucca’ structures, have bought more land and are sending their children to schools. Some of the top vendors, who have several hundred farmers under contract, make Rs 5 Lakhs per year.

Most multi-brand retailers overseas sell branded products as well as ‘house’ products, i.e. products manufactured by local vendors which they sell under their own brand name. These products are sold at a slightly lower price than competing branded products, but earn better margins. Even local multi-brand retailers have adopted the practice. For example, Spencers sells Kellogg's cereals as well as their own branded cereals. If and when the Tescos and Walmarts are permitted to open retail stores, they will find it profitable to engage local vendors in their procurements. Some are already doing it for their overseas stores.

A champion of small farmers has argued that initially the foreign retailers may pay top prices for local produce, but over the long term they will squeeze the small farmers for lower prices. The example of such a practice in the UK has been cited. The learned gentleman needs a lesson in geography. The entire UK will probably fit inside the state of UP in terms of size. India is a vast country in comparison. To reach the stage where all the small farmers get contracted to foreign retailers and then get squeezed in the long term is unlikely to happen even in the distant future.