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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.

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