Stock Queries - 09/30

I bought shares of Hindalco at Rs 163 and Sterlite Industries at Rs 171. Please give the short- to medium-term outlook for these two stocks. Can I re-enter them at current levels?

Rajesh Reddy G

Hindalco Industries (Rs 131.3): Hindalco has suffered a sharp cut since this July declining from Rs 197 to the recent low of Rs 125. The stock is in a strong medium-term downtrend since February. But this downtrend has not yet dragged the stock below its key long-term support at Rs 120.

Long-term view will turn negative only if the stock goes on to close below this level, further targets being Rs 106 and then Rs 68. Stop-loss for short- and medium-term investors can, therefore, be at Rs 115.

Investors with greater risk-taking ability can consider buying the stock in the band between Rs 120 and Rs 130 with the same stop. Bounce from here can take the stock higher to Rs 170 or Rs 204 in the days ahead. Key short-term resistance is at Rs 163.

Sterlite Industries (Rs 113.8): Sterlite Industries too has taken a knock since this August that has dragged the stock close to its critical long-term support at Rs 115. Investors can hang on to the stock as long as it trades above Rs 110.

A bounce from this zone can take the stock higher to Rs 160 or Rs 188 over the medium-term. The medium-term view will turn positive only on close above Rs 188, paving the way for rally to Rs 232 or Rs 285.

Can you please give the short- and medium-term outlook for Axis Bank?

Jaiprakash

Axis Bank (Rs 1,021.4): Last time when we had reviewed Axis Bank, it was hovering above a significant long-term support at Rs 1,200. We had then written that if the stock held above Rs 1,095, it will be positive from a long-term perspective. We had given the targets on a decline below Rs 1,100 at Rs 940 and Rs 780.

The stock breached the support level at Rs 1,095 in August, but it is attempting to rebound from Rs 1,000 which is a psychological support for the stock. Short-term investors can hold the stock with stop at Rs 980. Short-term resistances would be at Rs 1,235 and Rs 1,300.

The medium-term outlook for the stock, however, stays under a cloud. The stock could decline to Rs 940 or Rs 780 indicated above. Long-term investors need not lose heart as long as the stock trades above Rs 780. Investors can utilise such declines to buy the stock with stop at Rs 770.

I bought Jaiprakash Associates and Voltas at Rs 140. Please give technical outlook for these stocks.

G .Jayaramireddy Peddapodilla

Jaiprakash Associates (Rs 72.8): Jaiprakash Associates could not emerge from the strong bear market that pulled the stock down from Rs 340 to Rs 31 in 2008. The recovery in 2009 helped the stock retrace only half the losses and it has been trudging lower forming lower peaks and troughs since the October 2009 peak of Rs 180.

The medium-term trend decider at Rs 88 was breached in May and the stock hit the low of Rs 54 in August this year. The short- and medium-term trend in the stock continues to be down. The medium-term outlook will improve only if the stock goes on to close above Rs 102. Subsequent targets are Rs 134 and Rs 180.

If the stock fails to move beyond Rs 85, it will move lower to Rs 40 or Rs 31 over the ensuing months. Critical long-term resistance for the stock is at Rs 212, and it can be expected to move towards a new high only if this level is surpassed.

Voltas (Rs 111.4): Voltas is in an intermediate-term downtrend from the double-top formed around Rs 260 in November. This downtrend is halting at the long-term support around Rs 120. Investors can hold the stock as long as it trades above the critical support zone between Rs 100 and Rs 120.

Decline below Rs 100 will spell trouble and open the possibility of the stock declining to Rs 68 or even Rs 31. The stock will face resistance at Rs 140 and Rs 158 in the near-term. Medium-term resistances would be at Rs 168 and Rs 204. Volatility will continue in the stock as long as it trades below Rs 204.

I would like to know the technical outlook of Meghmani Organics and Astec Lifesciences. I am holding these two stocks over the last two years.

Rajesh

Meghmani Organics (Rs 8.9): This stock could regain only one-third of the losses recorded in the 2008 crash and it resumed its long-term downtrend from the October 2010 peak of Rs 22.7. Both the short- as well as the medium-term view for this stock is currently down and it appears headed towards its March 2009 low of Rs 6.

Key medium-term resistances are at Rs 14 and Rs 17. The long-term view will, however, turn positive only on a close above Rs 24.

Astec Lifesciences (Rs 35): This stock has been extremely volatile since 2010, rallying to the peak of Rs 93 to crash lower to Rs 27 by August this year. The stock is not too far above this low at present, and both the medium- as well as the short-term trends are currently down. Investors can hold the stock as long as it trades above Rs 27. It is, however, hard to judge where the decline can halt once the stock starts sliding lower.

If the current nascent uptrend sustains, the stock can rally to Rs 53 or Rs 68 in the days ahead. Investors with a short-term perspective can exit the stock on reversal from either of these levels.

I purchased Merck at Rs 700. What is the long-term prospect for this stock?

K.B.V.S. Prasad

Merck (Rs 621): Merck recorded a giddy rise in October 2010 when it rose from Rs 750 to Rs 1,000 in two weeks. But the stock has been continuously moving lower since then till it bottomed at Rs 553 in March.

A medium-term uptrend is on since then and this uptrend will be threatened only if the stock goes on to close below Rs 580. This can, therefore, serve as a stop-loss for investors with a lower investment horizon.

Long-term investors can, however, hold the stock with stop at Rs 550. The stock will continue to face a strong hurdle around Rs 730 and inability to move beyond this level will keep the stock volatile in the zone between Rs 550 and Rs 730. Once the upper boundary is surpassed, the stock can move on to Rs 780 or Rs 830.

Please advise me on Hexaware from medium-term point of view. I purchased the stock at Rs 74 and intend to hold for a time-frame of one year.

Vijaya Prabha

Hexaware Technologies (Rs 83.2): Hexaware Technologies has short-term support at Rs 62, and investors with short- to medium term perspective can hold the stock as long as it trades above this level. If the stock manages to hold above, it can consolidate in the range between Rs 62 and Rs 94 for a few months before breaking higher to Rs 100.

However, decline below this support will pull the stock to Rs 52 or even Rs 42 over the upcoming months.

Ways to make your child's dreams come true

It is the dream of every parent to ensure that their children's future is secure, especially by giving them the best education possible. However, planning for your children's education calls for more than just investing in the child plans advertised, with large doses of syrupy sentiment, by insurance companies or mutual funds.

Saving for a child's education requires careful planning, discipline and regular monitoring if you are to reach your target.

Take the following cases of investors who actually wrote in to us. Vaidehi, working in a software company, never planned for her children's education because of her confidence in her company's ESOP plan (Employee Stock Ownership Plan). She was sure that selling the options whenever the need arose would take care of all the education expenses.

However, when she actually wanted to put her son into a leading engineering college in Chennai, she discovered, to her shock, that her ESOPs did not cover even the first year's fee. She had to resort to taking a personal loan to pay the capitation fee and an education loan on top of that to pay the college fees.

Or take the case of Badri who, despite working in a MNC, had to run from pillar to post to arrange a loan when his son wanted to pursue higher education in the US. Since he doesn't believe in buying a house and had invested in land instead, he could not offer any collateral for the education loan.

These two instances underline the importance of the kind of proper planning and diversification required to build up your children's education corpus. So how can you go about building up such a fund? Here are some steps that can be followed:

Make your own plan

Most of us think that planning for our children's education stops with buying a standard plan sold by an insurance company or a mutual fund.

But such an approach could leave us with an inadequate corpus when we need it, for two reasons. One, we may not have accurately assessed the target corpus really needed for the child's education. The eventual corpus will obviously depend on how much one managed to invest in the plan.

Two, we may have failed to monitor the fund. If a neighbour told you to invest in a financial product and you wait till its maturity without monitoring and evaluating its performance at frequent intervals, there is every chance that the fund or plan you chose will fail to make the returns that you expected. This may ruin your chances of meeting your goal despite your saving diligently for the purpose. In investments, remember, one size will not fit all, because your risk appetite, time horizon, inflation and ability to save will matter the most in building a corpus.

Build the right portfolio

Construct your portfolio based on your risk appetite and time horizon. In a recent survey conducted by ING Life insurance, 50 per cent of Indian respondents said that their second biggest priority in investing is children's education. About 43 per cent those saving for their children start when the child's age is less than three.

But what was surprising was that, despite the long investment horizon, the majority of the investors put their money into fixed deposits, insurance and real estate, in that order.

Equity is the best asset class to beat inflation and also the ideal bet for the long term. That this asset fails to make it into the top four investment options clearly emphasises that investors are not constructing an appropriate portfolio for their children's education. Few of us can tell when the child is in primary school what course he or she may want to pursue. But, going by the common choices of today, pursuing an engineering education in a reputed college now costs Rs 8-10 lakh for a four-year period.

Putting your ward through medical studies, even through the management quota, will require you to shell out at least Rs 20 lakh(without capitation fees). If you want to send your child abroad to do a master's degree in engineering, it will work out to Rs 15-30 lakh, depending on the institution.

That needs to be adjusted for inflation too. At an inflation rate of 7 per cent a year, higher education expenses (of Rs 10 lakh at present) will go up to Rs 31.5 lakh in 17 years.

The medical degree will cost Rs 55 lakh in 15 years and for an overseas master's degree of Rs 30 lakh, you will have to spend Rs 82 lakh. Do remember, with so much demand for it, the cost of a good education may rise at a rate higher than the official inflation numbers. Assume you wish to build a corpus of Rs 30 lakh in 15 years, the anticipated return will decide your monthly savings. For instance, to achieve a return of 12 per cent, you need to save monthly a sum of Rs 6,005, if the target is 10 per cent it will be Rs 7,238 and, finally, if you are conservative and wish to achieve a return of 8 per cent, you ought to save Rs 8,670 a month.

Where to invest

It's all about deciding how much of your savings you need to put in individual asset classes such as equity, debt, gold and real estate. That should be based on your risk appetite and time horizon. For instance, an asset class such as equity may subject you to short-term losses but will be better to beat inflation with, in the long term.

Debt is more stable and will yield lower returns, which, at times, may even fail to beat inflation. How much equity you have in your portfolio should depend on your time horizon. If your child's education goal is just five years away, you need to put less in equity and more in debt. If it is 10 years or more away, go for a higher equity exposure.

If you start early, you can construct a portfolio with a higher exposure to equity of, say, 60 per cent, 20 per cent in debt and 10 per cent each in gold and real estate. You will find it difficult to invest in real estate on a monthly basis and need to park your surplus accordingly.

If you construct a portfolio as suggested by us, you should target an approximate return of 15 per cent, 7 per cent, 10 per cent and 8 per cent from the four assets suggested. That should average out to a 12.2 per cent annual return. There is no guarantee that the assets you choose will deliver the expected returns like clockwork. That is the reason why you need to evaluate the portfolio at regular intervals and take corrective steps accordingly.

And how do you break up the above allocations further? See Box story for the details.