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Charts & Analysis

Trading: Up 40% since Aug 30.

Trading updates: I’m up nearly 40% since I started (versus Index gain of 27%). A lot of changes to the portfolio this week.

On cash stocks, I had sold Jai Corp at 1278 as it showed signs of weakness…I bought nearly all of it back today as it showed strength again. I also bought L&T (at 3335) and Reliance Capital (at 1745). Today I added HOV Services – a stock that is unbelievable but seems to have been overlooked by everyone – at 205. A result arbitrage trade in Voltas didn’t quite work out, so closed it at a small loss. Closed positions: IGate, as I decided it wasn’t quite showing the momentum I wanted. Bought at 338, sold at 355 within two weeks.

F&O: Expiry was on Thursday and I sold out the 5100 puts as the Index neared 5200 as there was very little time left to expiry and these options were expensive. I owned some 5700 calls which obviously didn’t make the grade, but they were high risk and low cost anyhow. A number of Nifty future trades, based on momentum based directional calls, yielded nearly 20% on the investment this week. I took a loss in the Suzlon future the day before its results and I was totally unaware that the next day was results day! Had I stuck on, I would have made over 60% on that investment in a day – lesson learnt: don’t exit a stock before you check its event calendar.

Small losses also in NIIT Tech (waited for results and then the market didn’t like ’em), India Cements (another ridiculous intraday play – note to self: don’t play the intraday game, it doesn’t work for you) and in Nifty puts and calls on Expiry day (it was an attempt at a pinning strategy which didn’t quite work).

I managed a result move in Satyam – results being good, I picked up the future for a three day move. The very next day the stock ended up 5% higher, and I sold – the leveraged move yielding about 4,200 per contract. I sold as it retraced actually, a trailing stop loss in a way. Some quick momentum moves in RPL as well, over two days, have yielded an F&O profit. I own the stock in cash (as a longer term purchase) but the intraday moves in RPL scare me, as it could wipe out a significant amount of my capital. So I end up taking small profits. Lesson here is: Either increase your capital or don’t use these stocks on F&O, because I will not always be lucky.

What’s coming out of here is certain parameters I am comfortable with, and certain others I am not. There are lessons on multiple fronts: what kind of stop losses I should have, how I should deal with massive volatility, what kind of positions are within my comfort zone and finally, what data I need to make important trading decisions. My aim is to beat the index comprehensively – right now I’m up 40% and the index is up 28% in the same time frame, and I need to be much better. What’s interesting is that I did not overleverage myself, so I didn’t have too much of a problem during the dip, in fact I recovered all losses the day after the dip.

Note: This is my trading update. I don’t mean to recommend any of the above stocks, or even that you try anything like this. Don’t do it because I do it – as I’ve said I can afford to lose a significant amount of the money invested.

  • Anonymous says:

    >Congratulations.
    It is pity that you are not registered in Mauritius. (You could have avoided paying tax as business income)

    FIIs are doing this on a mega scale with Yen carry trade.

  • Deepak Shenoy says:

    >Well, even if I was registered in Mauritius I would pay tax as I live in India and will continue to do so.

    I have no problem paying taxes. Though I may do things to reduce the total amount of tax I pay (like availing of 80C exemptions, bonus stripping etc.) at the end of the day I will happily pay tax on the rest.

  • Anonymous says:

    >I had a chance of meeting a young trader working with an big FII trading on their proprietary account. He gave me some insights into their trading strategies.

    1. for them long term means 2 weeks to 6 months.

    2. They have no time to study fundamentals, they are momentum traders.

    3. Mauritius route is one of the best system in the world for tax avoidance on their trading (gambling). With the blessings of Indian Finance Ministry, SEBI, RBI etc. you cannot get anything better. He said “we are no fools to pay taxes”.

    4. He works on 3 huge trading screens on his desk at one time and has to be quick in his reflexes to trade. These desks are located abroad. He says it is extremely stressful to work as a trader. I believe it is true.

    5. Finally on a philosophical note he said “real good talent which could have been used for Technological Development have been attracted to this Finacial Engineering to perpetuate fraud, gambling and reckless risk taking”.

    Just tips to expand your trading.

    Good Luck.

  • Deepak Shenoy says:

    >Thanks for the warning there, mate. Yes, there are eternal blow-ups in trading,and it’s stressful – But I face far less stress nowadays compared to my earlier jobs, which were in the “technological” field, if you get my drift.

    Trading needn’t be quick reflex action stuff – read some of the big traders who trade about 5 minutes a day! I trade a few times a day and have realised that i can automate most of my trades – meaning I would be just as good if I took the signals as I got them, thanks to some software work we’ve done.

    Tax wise: If I could legally avoid paying taxes I would, like Infosys does although they need a lot more infrastructure than I do. FIIs I guess are the same, because we give them tax-free access. I say remove that access! Of course I also say remove Infosys’ tax free system, that’s as bad. Then we’ll have a level playing field.

    It’s derogatory to say that financial markets attract talent for fraud and gambling. Every thing attracts fraud and gambling, including highly technical fields like nuclear research. I think this is a very myopic view, though given the stress levels of the aforementioned trader I wouldn’t be very surprised.

  • Anonymous says:

    >Deepak,

    What is with the HOV services ?

    Its PE seems to be nearly 100 isnt it ? do you thnk its a potential ?

  • Deepak Shenoy says:

    >Anon: It’s a holding company of sorts, and so you should look at consolidated results. It’s been acquiring like crazy and is a BPO company, has over 12,000 employees in its consolidated portfolio.

    EPS, on a cons basis, is 31 Rs. THIS QUARTER. It makes over 1,000 cr. consolidated per year, so it’s not really a “small” company. I think this is simply an undervalued company and will get revalued over the next two years. I’ve made my stop loss 50% on this stock, it looks good enough to hold even in a serious drop.

  • Anonymous says:

    >Thanks Deepak on HOV.
    I will take a closer look.

  • Anonymous says:

    >Deepak,

    Here is what I feel about HOV…

    a) low PAT margin – 2% for Q1 and 15% for Q2 (Q2 margins were higher because of Rs.335mn other income, not sure where it came from but it cant be sustainable going forward).. (its < 10% historically).. b) They get 100% of revenues from North America, so rupee effect will b a big drag on the margins (remember jim rogers moved all his assets from USD to Yuan, fed rate cut will make USD come down even further)..
    c) They have a large chunk of workforce in US which is not going to earn them much

    d) Not a great management team too.. little chances of getting high end work and increasing their billing rate

    I am interested in hearing your thoughts on this.

    Thanks in advance for ur time

    Navin
    NS Capital Partners

  • Deepak Shenoy says:

    >Hi Navin, thanks for that.

    1) Interesting – I don’t know why I missed the other income! You’re right, about 33 cr. is other income which is unexplained yet (they haven’t posted results on their site, perhaps I will mail and ask) They also have “other expenditure” of 88.7 crores which is unexplained.

    2) Revenues from N.A. – is good because they spend also in dollars. They get a lot of defense and other contracts (Lason does) and they HAVE to be executed in North America. But they have the ability to move some other work to India and using Nafta, some work to Mexico.

    3) Margins are low. But that can only get better as they integrate Lason which has a huge Indian arm (more than 12,000 people totally).

    4) Top management team is a serious drawback, of course. Lason already gets some mid-level work, but not too much at the higher end – still, there’s a lot they can do because the scale is huge (they’re as big as FirstSource in revenues).

    There’s another issue actually. They’re going to dilute nearly 40-50% more – they’ve got permission in June – to issue Adrs/Gdrs to finance the acquisitions. That’s a drop in EPS by half at least.

    The structure is also weird – they own 100% of HOV LLC, which has bought Lason and all these companies taking on a ton of debt from a number of VC/PE funds. Only positive thing there is that debt costs in rupees comes down with teh dollar (and hopefully with the lower fed rate now)

    Overall I may have jumped the gun but I think I’ll wait for a couple quarters to see performance and then take a further call – am holding current values, not buying any more, not selling current (small anyways) quantity.

  • Anonymous says:

    >Thanks for the discussion, Deepak.

    Overall, I am going to buy too and prepared to wait.

    Thanks for bringing this stock to light.

    Navin
    NS Capital Partners