Trending the sensex

Here is a look at a potential trading option on the sensex.

Lets look at the sensex over a 5 year horizon

The hypothesis that I would like to posit is this: is taking a long position in the sensex, mid-year and squaring off at the end of the year a strategy that would earn a good return?

This is the case in 2005, 2006, 2007 and 2009.

2008 saw the height of the recession and the trend broke off, but re-established itself in 2009.

It seems that a poor performance in Q1 and Q2 is always offset by a bull run in Q3 and Q4.

Now considering that the stimulus will in all probability be withdrawn in several areas and a slight slide in Q1 2010, my guess is that the trend will continue on till June which will be followed by a revival.

Auto Ancillary stock – Amtek auto : Follow up

Before we take a deep-dive into the stock, it would be helpful to consider this link.

A look at the latest annual report of Amtek Auto shows

1. Fall in revenue/profits

2. Healthy dividend position maintained

3. Significant fall in Eps

Notes:

1. Significantly dependent on growth of 2,3 wheelers, tractors and commercial vehicles

2. The Indian addressable market fell from $18 bil to $16 bil, share of exports also fell

3. Europe and USA and the largest export markets

4. Indian automotive component and tyre companies serving the European market are attempting to meet European norms for automobile recycling, which is slated to come into effect by 2010.

5. The Indian Government recently reduced the excise duty applicable to automotive components to stimulate growth in the sales of passenger cars and utility vehicles.

6. The World Trade Organisation recently ruled against the imposition of 25 percent import duty on automotive parts by China. Indian automotive component manufacturers stand to gain significantly from the ruling as any cut in the duty will make their products cheaper in the Chinese market, and give them more access to the Chinese markets

Things to watch out for

• Exchange rates

• Trends in global automotive merger & acquisition activity

• Pressure of Counterfeit Components

• Raising Input Cost

• Higher Interest Rates

• Global sourcing of components from China which brings savings of nearly 17-20% as against the 15% to 17% in case of India.

In light of all this evidence the question is what do we think is going to happen within a 3 year horizon?

1. The number of 2,3 wheeler, tractor and com vehicles will explode, at least domestically

2. Export markets will also see a recovery and overcome the short term fall in sales

3. The threat from China remains credible but we should also consider the ISO quality certifications and the sizable domestic market position.

4. Access to credit and interest rates should cease to be a problem compared to last year

Price trends

During the year 2007 to 2008 Amtek practically mirrored the sensex during the crash. It had peaked at 490 and bottomed out at near 60. The subsequent revival in the sensex however did not reflect in Amtek. While most Auto stocks had a significant upswing in the bull run beginning January 09, Amtek has only managed a small rise. We believe that this is because of a cautious attitude towards an industry whose demand is very derived. Given the positive outlook and better results from Auto companies, it is only a matter of time for Amtek to get a slice of the pie and it is in our best interest to take advantage of this valuation.