Gladiator Stocks Lower cotton prices augur well for textile companies Scrip I-Direct Code Action Target Stoploss Upside Nandan Denim NANDEN Buy in the range of 152.00-157.00 210.00 137.00 36% RSWM RAJSPI Buy in the range of 330.00-342.00 405.00 298.00 21% Time Frame: 6 Months Research Analysts Dharmesh Shah dharmesh.shah@icicisecurities.com Pabitro Mukherjee pabitro.mukherjee@icicisecurities.com Nitin Kunte, CMT nitin.kunte@icicisecurities.com Vinayak Parmar vinayak.parmar@icicisecurities.com Dipesh Dagha dipesh.dagha@icicisecurities.com October 9, 2017
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Bumper cotton crop in CS 2017-18 to aid margins, going forward Deal Team At Your Service Average cotton prices (Shankar-6) were firm in the range of ~ 119/kg during July-August 2017 but prices started to correct (~3.5% to 115/kg) as the industry moved closer towards beginning of the new cotton season, which starts from October. According to ICAI, cotton acreage is anticipated to expand 10% YoY for the cotton season (CS) 2017-18 to 11.6 million hectare. Assuming the yield to be in the range 522 kg/ hectare, the output is expected to increase 4.4% YoY to 355 lakh bales vs. 340 lakh bales. Higher supply with stable demand should translate into further reduction in domestic cotton prices aiding the margins of textile companies from Q3FY18 For FY17, the prices of cotton, which is the key material for textile business (yarn and fabrics) saw a sharp rise in prices. Average cotton prices for FY17 grew by ~20% vis-à-vis the previous year thereby impacting the overall raw material costs and gross margins for players like RSWM and Nandan denim. The gross margins for Nandan denim de-grew by 122 bps YoY to 32.5% in FY17 as compared to 33.7% in FY16. Similarly gross margins for RSWM de-grew by 145 bps YoY to 43.3% in FY17 as compared to 44.7% in FY16. However for FY18, International Cotton Advisory Committee (ICAC) has given a guidance of bumper cotton crop. The cotton acreage is anticipated to expand 10% YoY for the cotton season (CS) 2017-18 to 11.6 million hectare. Assuming the yield to be in the range 522 kg/ hectare, the output is expected to increase 4.4% YoY to 355 lakh bales vs. 340 lakh bales. Higher supply with stable demand should translate into further reduction in domestic cotton prices reversing the negative impact faced by textile companies in FY17. Improved demand scenario coupled with expansion in margins could result better financial performance for companies like RSWM and Nandan denim Cotton Prices monthly chart ( /per kg.) 135 125 Cotton prices are in declining trend on the monthly scale 115 105 95 85 Source: Bloomberg, ICICI Direct.com Research 2
Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Nandan Denim (NANDEN): Breakout from two year consolidation CMP: 168.00 Buying Range: 152.00-157.00 Target: 210.00 Stop loss: 137.00 Upside: 36% Stock Data 52 Week High / Low 174/105 50 days EMA 145 200 days EMA 135 52 Week EMA 135 Face Value ( ) 10 Market Capitallisation ( Cr.) 307 *Recommendation given on i-click to gain on October 9, 2017 at 10:42 hrs Stock price vs. BSE Small cap 200 180 160 140 120 100 80 Price performance last five years 80% -50% NDL 37% 40% 79% BSE Small cap 23% -23% Year 2013 2014 2015 2016 YTD Source: Bloomberg, BSE, ICICIdirect.com Research 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 Technical View Nandan Denim is one of India s largest denim fabric company based out of Gujarat. It is one of the largest vertically integrated player and one of few denim manufacturers capable of dyeing denim years with sheet dyeing and rope dyeing technologies. The share price of Nandan Denim has been underperforming within the small cap group over the past two years as it remained in an extended consolidation phase. Break out from two year long consolidation augurs well... The stock has resolved out of its two year consolidation range in today s session to challenge its previous life-time high of 174 signalling culmination of long term price wise and time wise correction and confirmed resumption of the primary up trend. Technically, this is an incremental opportunity to own the stock in order to benefit from expected price rally over the coming months. Robust price structure... Since its August 2015 peak of 174, the share price has been consolidating in the broader range of 160-110 as it retraced its preceding 18 month rally (February 2014 July 2015) from 28 to 174 by only 50% while taking almost 1.5x the time taken by the preceding rally. The shallow price wise correction and elongated time wise correction forms the cornerstone of robust price structure and quantifies the two year long consolidation as secondary corrective phase within the larger degree uptrend. From a medium term perspective, October 2017 lows of 138 remains an immediate support for the stock price. Faster retracement of last falling segment The key observation in current month s trade is that the price has successfully overhauled the most recent four week declining leg ( 157-134) in less than two weeks. Faster retracement of the last falling segment and breakout from two year consolidation highlights a structural turnaround and signals resumption of the next major up move. Momentum oscillators, volume indicate strength in price structure Among oscillators, the weekly MACD (E-12/26/9) is in a positive territory and has generated a bullish crossover above its nine period s average signalling strength in the price trend. On the volume front, the stock has attracted a trading volume of over 8 lakh shares in today s session surpassing its 10-week average of 5.67 lakh shares, thereby highlighting renewed appetite for the stock. Both, momentum and volume corroborate bullish price structure Conclusion Considering the robust price structure and above-mentioned technical observations, we expect the stock to continue with its uptrend and head towards 210 over the medium term as it is the measuring implication of the two year consolidation range ( 160-110=50 points) as projected from breakout level of 160 3
Nandan Denim (NANDEN): Weekly Bar Chart Measuring implication of two year range breakout @ 210 The strong resolution from two year consolidation augurs well 174 160 97 100 The weekly MACD has generated a bullish crossover thus validating positive bias Source: Bloomberg, ICICIdirect.com Research 4
Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 RSWM (RAJSPI): Attractively poised near long term value area CMP: 342.00 Buying Range: 330.00-342.00 Target: 405.00 Stop loss: 298.00 Upside: 21% Stock Data 52 Week High / Low 511.90/303.5 50 days EMA 345 200 days EMA 389 52 Week EMA 388 Face Value ( ) 10 Market Capitallisation ( Cr.) 392 *Recommendation given on i-click to gain on October 09, 2017 at 10:49 hrs Stock price vs. BSE Small Cap 550 500 450 400 350 300 250 200 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 Technical View RSWM Ltd is engaged in the manufacturing, spinning, weaving and processing of manmade textile fabrics. The company is also engaged in cotton spinning and weaving. Its segment includes yarn fabric and denim. The share price of RSWM remains in a secular uptrend, forming rising peaks and troughs on the long term price chart. We believe the corrective decline since hitting life-time high of 511 in February 2017 has approached maturity and the stock is attractively poised above key value area thereby providing good buying opportunity from medium term perspective. Bargain hunting at major value area provides entry opportunity The corrective decline off life-time high of 511 has found its feet precisely near the major value area of 300 as it is the confluence of the following technical parameters: The lower boundary of the rising channel marking price wise equality with the 2010-12 decline is placed at 300 The value of long term rising 200 week EMA is also placed around 315 80% retracement of the last rising segment is also placed at 300 region The stock attracted strong demand amid bargain hunting at the key value area as it formed identical lows at 300 region in September and October 2017 before producing a firm rebound over the last two weeks. The positive divergence exhibited by RSI oscillator on a weekly as well as daily scale highlights waning downward momentum as the price approached major value area ahead of the impending reversal. We believe the sizable price wise correction of nearly 40% from the life-time high of 511 over the last nine months has helped the stock work off the overstretched conditions developed after the multi-fold rally witnessed since 2012-17. This has created an attractive buying opportunity for medium term investors to ride the next up move within the larger degree uptrend. RSWM BSE Small cap Price performance last five years 80% 79% 37% 40% 23% -23% -50% Year 2013 2014 2015 2016 YTD Source: Bloomberg, BSE, ICICIdirect.com Research Momentum oscillators highlight build up of positive momentum Among oscillators, the monthly stochastic has generated a positive crossover above its three month average after rebounding from highly oversold reading of 11 during the current month. It indicates build up of positive momentum and augurs well for continuance of the up move over the coming months. Meanwhile, the weekly as well as daily RSI is exhibiting positive divergence by forming higher low against lower low on price front signalling waning downward momentum and supports further up move on the price front going forward Conclusion Considering the robust price structure and above-mentioned technical observations, we believe the stock is at the cusp of resuming its primary uptrend and provides good entry opportunity for medium term perspective. We expect the stock to retrace its 2017 decline ( 511 to 303) by at least 50% over the coming months which provides headroom for the current up move to head towards 405 levels in the medium term. 5
RSWM (RAJSPI): Monthly Bar Chart The stock is at the cusp of resuming its primary uptrend after a sizable price wise correction and provides fresh entry opportunity 511 50% @ 405 303 204 The stock placed at major value area of 300 : -Lower band of long term channel - 80% retracement of the last up move 59 Positive crossover on monthly Stochastic Source: Bloomberg, ICICIdirect.com Research 6
Strategy Follow up Date Scrip Name Rec Price Target Stoploss CMP Return till date (%) 13-Jul-17 ABB 1460 1720 1320 1381-5.4% 13-Jul-17 VA Tech Wabag 665 795 570 585-12.0% 19-Jul-17 Sundaram Finance 1650 1990 1490 1695 2.7% 27-Jul-17 GE T&D 408 505 355 385-5.6% 2-Aug-17 United Spirits 2580 3150 2298 2345-9.1% 3-Aug-17 Philips Carbon 590 1050 840 935 58.5% 16-Aug-17 NCC 85.5 112 73 85-0.6% 16-Aug-17 Simplex Infrastructure 460 589 395 482 4.8% 13-Sep-17 Reliance Naval Engineering 56 69 47.5 52-7.1% 18-Sep-17 Asian granito 485 615 430 495 2.1% 19-Sep-17 PNB 143 170 129 136-4.9% 19-Sep-17 Bank of India 154 182 139 140-9.1% 9-Oct-17 Tata Power 80 98 72 81 1.3% Summary Performance - Recommendations till date Total Recommendations 300 Open 13 Closed Recommendations 287 Yield on Positive recommendations 18.0% Positive Recommendations 220 Yield on Negative recommendations -8.0% Closed at cost 6 Strike Rate 78% 7
Notes It is recommended to enter in a staggered manner within the prescribed range provided in the report Once the recommendation is executed, it is advisable to keep strict stop loss as provided in the report on closing basis. The recommendations are valid for six months and in case we intend to carry forward the position, it will be communicated through separate mail. Trading portfolio allocation It is recommended to spread out the trading corpus in a proportionate manner between the various technical research products Please avoid allocating the entire trading corpus to a single stock or a single product segment Within each product segment it is advisable to allocate equal amount to each recommendation For example: The Momentum Pick product carries 3 to 4 intraday recommendations. It is advisable to allocate equal amount to each recommendation 8
Recommended product wise trading portfolio allocation Product Allocations Product wise Max allocation allocation In 1 Stock Number of Calls Return Objective Duration Momentum Picks- Intraday Momentum Picks- Positional 10% 30-50% 2-3 Stocks 1-2% Intraday 25% 8-10% 6-8 Per Month 5-8% 1 Month Stocks on the move 25% 12-15% 6-8 Per Month 10-12% 3 Months Gladiator Stocks 35% 15-20% 20-30% 6 Months Cash 5% 100% - 9
Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com 10
Disclaimer ANALYST CERTIFICATION We /I, Dharmesh Shah, Dipesh Dagha, Nitin Kunte, Pabitro Mukherjee, Vinayak Parmar Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number INH000000990.ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on www.icicibank.com ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this section have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Nonrated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. The research recommendations are based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. These research recommendations and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. ICICI Securities will not treat recipients as customers by virtue of their receiving these recommendations. Nothing in this section constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed herein may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of these recommendations. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. 11
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