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SOS Trade: Short ICICI Bank

The Short Only Strategy now begins its virtual life. The first trade is pretty simple.

Short ICICI Bank

So I’ve decided the Banking sector is weak going forward. The best way to cash in is to short the extended banks – the weakest of the pack. While on a 3 month relative strength basis, Axisbank is weak, ICICI is the weakest among the biggies in a 6 month scenario. Fundamentally too, there are issues:

  • EPS Growth is negative as of last quarter, and even net profit is down on an absolute basis.
  • NPAs seem to be increasing. At the size they are, ICICI is likely to see huge losses unless interest rates decrease, and I don’t expect that till 2009.
  • At the other end credit offtake is reducing because of high rates and RBIs clamping down on credit growth. Not good.
  • We have yet to see corporates begin to default, only retail has shown that inclination till now. We will see corporates negotiate or drop the ball completely, and ICICI will get hit.
  • The upside is that their may list their insurance and AMC subsediaries. Uhem. Bad market but anything is better than zero of course.
  • The bad worldwide credit situation is going to get worse, and with liquidity drying up and deleveraging happening, their treasury and lending activities are likely to take big hits (in comparison with their profits)
  • Capital is huge and fairly adequate, so they won’t go bankrupt or anything like that.
  • But they can’t sustain a 17-20 trailing P/E. I would expect that to come to 10 or so.

So I will go “virtually” short on ICICI. At Rs. 674 on the future today, with a lot size of 175, I would put 10% of a virtual portfolio on this short. Since I’m running 50L, I will put 5L on this. Forget margins and all – I am going totally unlevered on the fund.

That means 4 contracts (700 shares) of ICICI short at 674.

Will note and mark to market every week in a google doc. If you are interested the margin demanded by the broker is going to be about Rs. 2.5L., but I allocate the full 5L on it.

I know, still have to work on the presentation of this, but it should be done over the weekend.

  • Siddharth says:

    >Dead cat bounce is amazingly spectacular.
    Wished I had spare money around to purchase gold, more gold….
    And given the latest 6th commission pay hike’s effect of health of country’s finance, RBI may have to raise rates little more further in October?

    But banks are making good money. My friend was telling me he used to pay INR18000 pm as interest but now it has gone up to INR32000 pm. so the number of years have gone to 35 or something and it will be around 1.35 crores by the time the home loan will be finished!
    But if the rates go up again how many of the loan a/c holders will afford to pay increased emi’s who dont have other options to increase their monthly income? Gives me a horrifying chill. Whatever this is not good.

  • Anonymous says:

    >Dear Depak,
    I came to your Blog from VFM direct where i am regular.(vpbrangarajan)

    I liked the strategy of SOS. Name is catchy SOS>

    While i was inherently long I started shorting to manage volatility and MTM. I also shorted ICICI at 766
    and also bought a put 700 strike.
    at 700 when it reversed went long at 710 after squaring of my short but holding the put.
    next day i squared of put at profit and holding long with a stop loss of 663.

    I realize there could be pairs of long and short. Say short ICICI and long SBI.

    Such a strategy would reduce risk on up side but would definitely enable digging in to more strong counters.
    views please.
    regards
    Ranga

  • Deepak Shenoy says:

    >ranga: Pairs are interesting but are purely arb. I am talking about the whole banking sector underperforming, and in that, ICICI being the worst. That’s my opinion.

    A Short only strategy is directional – it is only short. And the idea is not arbitrage (pairs is an example of statistical arbitrage ) – it is to benefit from weakness, both sectoral and stock specific.

    Buying a put and shorting a future is similar on direction – if you buy a future and buy a put you may be hedged against a violent down move but the put loses value if it goes down very slowly (plus you lose on the future as well).

  • Mr. V says:

    >What’s the leverage for ICICI Bank ?

    How about SBI ? If ICICI Bank is going to suffer then I expect SBI to get hosed even more.