ambit shortingindia

8/11/2019 Ambit ShortingIndia

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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capitalmay have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Alpha This Week

September 09, 2014

Derivatives

Securities featured in this noteCompany Near

TermMedium

term

Nifty ( ) ( )

Infosys ( ) <->

Bajaj Auto ( ) ( )

Bharti ( ) ( )

Bank of Baroda <-> ( )

ONGC ( ) ( ) ICICI Bank ( ) ( )

MSCI EM <-> ( )

( ) denotes positive view , ( ) denotesnegative view, <-> denotes no major

view

Analyst Details

Gaurav Mehta, CFA+91 22 3043 [email protected]

An alternative take on m arkets

17th Sept 2 13While sustenance above the 8130-8150 region should amount to yetanother breakout for the Nifty, we believe such a sustenance is suspectgiven the widespread complacency in markets currently. Net options’protection bought by FIIs is at multi-year lows currently suggesting a nearabsence of hedges; Nifty implied volatility is almost at the lowest levelseen in the last decade again reinforcing widespread complacency;broader markets aren’t following frontline benchmarks to newer highswith both the CNX Midcap index and the CNX Smallcap indexunderperforming the Nifty since the early July peaks, indicatingdeterioration in market breadth. Overall, while staying positive on Indianequities for the longer term, we believe a near term correction shouldserve us well to shrug off complacency and bring back a healthy level ofskepticism. On stocks, we are negative on Infosys while the five largecaps best placed technically in our view are Bharti, Bajaj Auto, ONGCBank Baroda and ICICI Bank.

Index : We reiterate our view that the Nifty has been and stays to be in astructural uptrend ever since the mega 6350 breakout.

From a near term perspective, a sustenance above a critical trendline in the8130-8150 region should imply a fresh breakout; however, we believe such asustenance is suspect given the widespread complacency, as also supportedby record low Nifty Implied Vols along with near absence of optionsprotection for FIIs.

Nifty Implied Vols at near record lows indicating complacency!

Source: Metastock

Stocks : Amongst frontline large caps, IT is a space that looks stretched nearterm and may face near term pressure. We are negative on Infosys from thisspace. On the flip side, Oil & Gas stays attractive with ONGC being our toppick. We also like Bharti, Bajaj Auto, ICICI Bank and Bank of Baroda from thelarge cap universe.

FIIs in derivatives : FIIs’ index futures long positions have moved upsignificantly over the past few weeks but are still away from optimisticextremes! However, net options protection bought by FIIs (net puts minus netcalls), has plunged into the negative territory and is now at the lowest pointsince Jan’12. This implies a near absence of hedge and is worrying from acontrarian standpoint!

Institutional flows: The flows situation reverts to the usual with FIIs returningto being aggressive buyers of Indian equities and DIIs turning sellers againafter finishing August as BUYers!

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Alpha This Week

September 09, 2014 Ambit Capital Pvt Ltd

IndexNifty- Structural trend stays UP!

Source: Metastock; this is a quarterly log chart of the Nifty

We have maintained a bullish outlook on the Nifty for the last many months- this view has been based on the structural uptrend, that began in 2003, being stillintact (on log, quarterly charts)

Moreover, we have also maintained that with the 6350 breakout, the Nifty hasbroken out from a six year long bear market!

Overall, the run up of the past few months has only reinforced our conviction inthe long term uptrend of Indian equities and we believe we are in the early stagesof a long term bull run!

Nifty near term

While a sustenance above the 8130-8150 region should amount to yet anotherbreakout for the Nifty, we believe such a sustenance is suspect given the

widespread complacency in markets currently as noted below Net options’ protection bought by FIIs is at multi-year lows currently suggesting a

near absence of hedges; Nifty implied volatility is almost at the lowest level seenin the last decade again reinforcing widespread complacency; broader markets

aren’t following frontline benchmarks to newer highs with both the CNX Midcapindex and the CNX Smallcap index underperforming the Nifty since the early Julypeaks, indicating deterioration in market breadth.

Indian equities are in a structuraluptrend!

Sustenance above the criticaltrendline in the 8130-8150region appears suspect!



Alpha This Week


Nifty Implied Vols near record lows!

Source: Metastock

At levels nearer 12, implied volatility on Nifty options is at almost the lowest levelseen over the past ten years suggesting widespread complacency

This coupled with near absence of options hedges by FIIs is worrying from acontrarian standpoint and suggests a sustenance above the key trendline in the8130-8150 region may be suspect

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Nifty IVs

Decade low levels on ImpliedVols, coupled with near absenceof options hedges by FIIs, suggestcomplacency!



Alpha This Week


StocksInfosys- Strong resistance!

Source: Metastock Amongst frontline large caps, IT is a space that looks stretched near term and may

face near term pressure Infosys from the space looks vulnerable with strong channel and range resistance

at nearly 3800 levels; moreover, on daily charts, near term negative divergence with the MACD is developing

We are Sellers on the stock on our bottom-up research and would recommendcreating shorts in the stock

Bharti

Source: Metastock

We have been highlighting a long term break out from around the 355-360region on Bharti and this break-out marks a reversal from its long term downtrend

The breakout has obviously bullish implications with near term targets in theregion of 440-450 while over longer time frames the stock should look to target570-580 levels!

Infosys faces stiff resistance at3800

Stay bullish on Bharti on the backof its long term breakout!



Alpha This Week


ICICI Bank

Source: Metastock

We have been positive on ICICI Bank for a long time now based on structuraltrends like a multi-year trendline support and then a breakout from a long termcongestion; this breakout has strong bullish implications from a long term,structural point of view and makes the stock a key way to play the Indian equitysurge from a long term point of view

Moreover over the past month we have been highlighting an inverted Head &Shoulders breakout from around 1500 levels with immediate upside targets of1680-1700; we maintain that view and stay positive on the stock

Bajaj Auto

Source: Metastock

Bajaj Auto had been in a sideways consolidation for the last two years and hadrecently broken out from this consolidation near the 2100 mark

On the upside, this break-out implies resumption of the long term uptrend in thestock and we believe targets nearer 2600 are likely in the immediate term and3000+ over the medium term

We have a fundamental BUY on the stock and it features in our Good & Cleanportfolio as well

Long term as well as near termbreakouts for ICICI Bank!

Bajaj Auto amongst the mostattractive Nifty stocks!



Alpha This Week


ONGC

Source: Metastock

We have stayed positive on ONGC, both on the basis of the long term breakout it

had staged near the 360 level, as well as because of the near term bullishcontinuation pattern it had been carving out recently Further, over the past month we have been highlighting how the stock had broken

out from this continuation pattern; we stay positive on the stock for target levelsnearer 480 in the near term

Bank of Baroda

Source: Metastock

Bank of Baroda appears the best placed stock from the PSU banking spacetechnically

The near term bullish continuation pattern implies medium targets of 1300 on thestock over the next few months

Moreover, we recently turned buyers on the stock fundamentally as well and findit to the best placed PSU bank from a bottom-up perspective too

Stay positive on ONGC for a 480target!

Upside target on Bank of Barodaat 1300!



Alpha This Week


Larsen & Toubro

Source: Metastock

Similar to ICICI Bank, L&T is a stock that had been in a broader, longer termconsolidation over the last several years and had subsequently broken out fromthe upper end of the consolidation at around the 1300 mark

This breakout has strong bullish implications from a long term, structural point of view and makes this stock yet another play on the Indian equity surge from a longterm point of view

1350 on the way down should be a massive support point and any declines tonear those levels are attractive entry points!

L&T stays structurally strongtechnically; 1350 attractive longterm entry point!



Alpha This Week


FIIs in derivativesIndex derivatives- FIIs’ options protection at multi-month lowsExhibit 1: FII index futures positions

Source: Ambit Capital research

Exhibit 2: FII index options positions


FII index futures activity : FIIs’ index futures long positions have moved upsignificantly over the past week but are way off historical highs!

FII index options activity : Net protection bought by FIIs (net puts minus netcalls), on the other hand, has turned negative now and is at multi-year lowsimplying complete lack of hedges and hence caution!

Stock futuresExhibit 3: FII stock future positions versus INR hedge cost


FIIs are in general short stock futures to exploit the cash-future arbitrageopportunity; usually arbitrage positions are inversely correlated to INR hedge cost.

Due to the INR stabilizing and the hedge cost declining, these positions had beenrising steadily over the last year or so.

Over the last few weeks, however, the INR hedge cost has increased, whichalongside some tax-related provisions in the budget, may have led to anunwinding of some of these positions.

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FII stock futures' position

FIIs’ net protection bought inoptions plunges below the zeroline; at multi-year lows!

FIIs’ cash-futures arb positionscontinue inching lower!



Alpha This Week


Global perspectiveThe EM/ DM price ratio recovering from Lehman lows

Source: Metastock; this exhibit plots the price ratio of MSCI EM index over MSCI World index We have been highlighting how the MSCI EM to MSCI World ratio is in touching

distance (about 3-5%) of the post Lehman lows hit in late 2008 and providesattractive entry points to play a reversion of this trade in favour of EMs from astructural stand point

Even with some recent outperformance of EMs, the ratio has only slightly inchedup and we believe has just begun the process of reversing multi-yearunderperformance versus the developed world equities!

India reversing prolonged underperformance v/s DMs

Source: Metastock; this exhibit plots the price ratio of MSCI EM index over MSCI World index

Similar to the relative performance of EMs versus DMs highlighted above, theDefty (dollar adjusted Nifty) to DM ratio had also retested post-Lehman lows

With the recent strength in Indian equities this ratio is now bouncing off fromthose pessimistic extremes

This relative positioning along with the structural breakout highlighted earliershould mean that there is much further to go on the way up for Indian equities

from a longer term standpoint!

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Defty to MSCI World

EM/DM ratio is recovering from post-Lehman lows- time for EMsto outperform!

Defty/DM ratio has bouncedback from post-Lehman lows



Alpha This Week


India equity flowsWeekly flowsExhibit 4: Weekly FII and DII cash equity flows


Institutional activity over the last week reverted to usual with FIIs turningaggressive buyers while DIIs turned sellers again; FIIs bought Indian equities

worth just Rs 45bn last week For the month of Aug, FII flows were relatively subdued as they finished buyers of

equities worth Rs 27bn after having bought equities worth Rs 70bn in July

Monthly flowsExhibit 5: Monthly FII and DII cash equity flows


DIIs returned being sellers of Indian equities as they sold equities worth Rs 21bnlast week

On a monthly basis, DIIs finished buyers after several months of outflows; theybought equities worth Rs 23bn in Aug, having sold equities worth Rs 32bn in July

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FII Flows DII Flows

Institutional activity reverts tousual as FIIs turn BUYers ofIndian equities….

… while DIIs turn sellers againafter finishing Aug as buyers



Alpha This Week


Institutional Equities TeamSaurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta Banking / Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]

Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Real Estate (022) 30433205 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave Healthcare (022) 30433212 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 [email protected]

Ritesh Vaidya Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]

Utsav Mehta Technology (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected] Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction



Alpha This Week

September 09 2014 Ambit Capital Pvt Ltd

Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

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Additional Disclaimer for Canadian Persons25. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities nor is it registered in the Province of Ontario and /or Province of Québec to provide advice

with respect to securities.26. AMBIT Capital's head office or principal place of business is located in India.27. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.28. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.29. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2

Canada.30. Name and address of AMBIT Capital's agent for service of process in the Province of Montréal is Torys Law Firm LLP, 1 Place Ville Marie, Su ite 1919 Montréal, Québec H3B 2C3 Canada.

© Copyright 2014 AMBIT Capital Private Limited. All rights reserved. Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor449, Senapati Bapat Marg, LowerParel, Mumbai 400 013, India.Phone: +91-22-3043 3000Fax: +91-22-3043 3100

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