alpha this week an alternative take on markets

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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capitalmay have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Alpha This Week

December 02, 2013

Derivatives

Securities featured in this note

CompanyNearterm

Mediumterm

Nifty ()

CNX Auto () ()

CNX IT () ()

Wipro () ()

Bajaj Auto () ()

Tata Motors () ()

MSCI EM () ()

CNX Small Cap () ()

DXY () ()

Gold ()

WTI Crude ()

() denotes positive view, () denotes negative

view, denotes no major view

Analyst Details

Gaurav Mehta, CFA+91 22 3043 [email protected]

An alternative take on marketsWe maintain our view that the 6350 breakout is only a matter of time.Continued outperformance of small caps and rotation of money intocyclicals are trends that reinforce this view. Even with electionuncertainty looming large, 5700 should be the worst case for the Niftybefore an eventual breakout. EMs in general should outperform DMsfrom here on as the dollar index weakens further. Commodities likeGold and Crude may also be setting for near term rebounds.

Sectorally, we are buyers on CNX Auto while we stay negative on CNXIT.On stocks, we find Bajaj Auto to be an attractive Buy; we remain bullishon Tata Motors and bearish on Wipro.

Index

: Even with state election outcome uncertainty looming large, worstcase downsides should be 5700 before an eventual 6350 breakout;continued small cap outperformance suggests healthy market internals

Sectors: We are Buyers on CNX Auto while we stay bearish on the CNXITindex

Stocks: We find Bajaj Auto to be an attractive Buy; we remain bullish onTata Motors and bearish on Wipro

Commodities: Gold and Crude look set for bargain buying ledbouncebacks

Exhibit 1:The BIG chart- Nifty poised for breakout soon

Source: Metastock

Emerging markets: With the EM to DM price ratio now back at Aug lows,we expect EMs to outperform from here on

Dollar Index: Primary trend remains down; 82 should be the upper cap India Small Caps: More room for continued outperformance FIIs derivatives positions off optimistic extremes: While still high, FIIs

leveraged long positions at the index level are off optimistic extremes

Volatility: After a period of cool-off, Nifty IVs inch up from the 200dma Flows: FIIs remain Buyers of Indian equities while DIIs continue being heavy

Sellers


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Alpha This Week

02 December 2013 Ambit CapitalPvt Ltd Page 2

IndexNifty- Verging on a breakout

Source: Metastock; this is a quarterly log chart of the Nifty

With the structural uptrend that started in 2003 still intact on the Nifty, wecontinue to believe that the index is verging on a breakout above 6350

Even as event uncertainty in the form of state election results looms, we thinkdownsides in the worst case should be limited to 5700 before an eventual 6350

breakout

We thus think that any correction is a great long term Buying opportunity

CNX Small Cap Index- Continued outperformance

Source: Metastock

Amongst the most encouraging signs of the current market rally has been thecontinued outperformance of small caps implying that unlike the rallies of last few

quarters, this is a more broad-based rally

We have been highlighting that with a series of positive divergences with itsmomentum indicator, the MACD, the small cap index had broken out from amulti-month channel near 2830

With a near term bullish continuation pattern in place, small caps should continuewith their upside momentum both on a relative and an absolute basis

Technicals positive for the smallcap index


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Alpha This Week


Global perspectiveDollar Index- Trend remains down

Source: Metastock

As we have been highlighting, the dollar index, which had put in a couple ofprominent negative divergences with the momentum oscillator, MACD, had also

broken down from a multi-month trendline

The primary trend on the index thus is down with 82 or thereabouts being themaximum upside potential

The EM/ DM trade should reverse in favour of EMs

Source: Metastock

With the MSCI EM to MSCI DM price ratio dipping again, the ratio has retestedAugust lows

We believe this is part of the bottoming process for EMs relative to DMs and thatthe ratio should revert to the upside from hereon implying outperformance for

EMs versus DMs

The structural weakness in dollar as discussed above should aid a relative revivalfor EM performance

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MSCI EM to MSCI DM

Primary trend on the dollar indexis down

EM/DM ratio retests Aug low-

expect EMs to outperform fromhereon


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Alpha This Week


CommoditiesGold- Time for bargain hunting?

Source: Metastock

We have time and again reiterated our negative stance on Gold for the pastseveral months; at current prices, however, Gold provides a low stop loss Buying

opportunity for the near term

In the 1220-150 region, the commodity should be supported by a multi-yeartrendline that had defined the secular upmove since 2005 and hence current pricepoints should be attractive for bargain buying with stop loss below 1220

WTI Crude- Bounceback due

Source: Metastock

Similar to Gold, WTI Crude is at strong support levels too and a bounceback fromcurrently oversold territory looks likely, atleast in the short term

The commodity finds itself at two key trendline, one uptrending and onedowntrending, converging near the 92 mark, which should thus provide for strongsupport for the commodity

One may thus consider longs with stop loss below 91-92 levels in WTI crude

Gold should be bought with stop

loss below 1220

Crude should see a bounceback

too


5/12

Alpha This Week


Sector ideasCNX Auto- Buy

Source: Metastock

We have been positive on Auto names and the index over the last few months;even with the recent upmove the index has more steam to go on the way up

The triangule breakout in early October suggests upside targets of 5600 on theindex

We highlight Tata Motors and Baja Auto as top buys from the sector in the nextsection

CNX IT- Sell

Source: Metastock

We reiterate our Sell stance on CNXIT- the index had broken down from animportant trendline that had defined its upmove since June; since the break in lateOctober the index has traded sideways

Moreover the latter part of the price upmove was on negative divergence with themomentum, i.e. price highs had not been confirmed with similar highs on the

momentum oscil lator, the MACD, thus further corroborating the negative outlook

We recommend shorts with stop loss above 9100 on the index and highlightWipro as a short candidate at the stock level from this space in the next section

More upsides for CNX Auto index

CNX IT- headed lower


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Alpha This Week


Stock ideasBajaj Auto- Buy

Source: Metastock

With a positive stance on the Auto index, we find Bajaj Auto favorably placedcurrently from a technical standpoint

The stock after its recent decline is back at the trendline it had broken out from inSep 13 and should find strong support here near the 1900 mark

On the way up the stock should look to target 2250-2300 on the way up Fundamentally we are Buyers of the stock and it features in our Good & Clean

portfolio as well

Wipro- Short

Source: Metastock

With our negative view on the CNXIT index, we have been highlighting Wipro asan interesting short candidate

In addition to breaking a key trendline that had defined its upmove since Junelows, the stock has also broken down from a bearish continuation pattern recently

In the latter part of the upmove, the stock had carved out a negative divergencewith its momentum indicator, the MACD, as well

Fundamentally we are SELLers in the stock too and maintain shorts with targetsnear 430-440 and stop loss above 490

Buy Bajaj Auto for targets near

2250 and stop loss below 1900

Maintain Wipro for targets near430-440 and stop loss above 490


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Alpha This Week


Tata Motors- Buy

Source: Metastock

We stay buyers on Tata Motors- the breakout from an important trendline thathad stalled all upmoves since 2006 is bullish and implies limited downsides

This trendline should now provide strong support in the 360 region; on the wayup targets should lie in the 430-440 region

Fundamentally we are BUYers in the stock from a bottom-up research perspectiveand the stock features in our Good & Clean portfolio as well

Remain bullish on Tata Motors


8/12

Alpha This Week


FIIs in derivativesIndex derivatives- Optimistic extremes

Exhibit 1: FII index futures positions

Source: Ambit Capital research

Exhibit 2: FII index options positions


FII index futures activity: FII index futures positions are now off the optimisticextremes seen in early Nov- the positions however still remain high with respect tohistory

FII index options activity: Net protection bought by FIIs (net puts minus net calls)too has inched higher suggesting some bit of cool-off in aggressive bullishness

Stock futuresExhibit 3:FII stock future positions versus INR hedge cost


FIIs are in general short stock futures to exploit the cash-future arbitrage; usuallyarbitrage positions are inversely correlated to INR hedge cost

After massive unwinding of these positions in the May to Aug period, since theAug expiry cash-futures arbitrage positions are staging a comeback with INRstabilizing and hedge cost declining

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netlongopeninterest(no.of

contracts,

indexfutures)

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r-12

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netputsminusnetcalls

2%

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14%(800,000)

(600,000)

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INRhedgecostproxy(NDF

1m-2mspreadannualized)

F

IIstockfuturenetshort

contracts

FII stock futures' posi tion INR hedge proxy

FII index derivatives positionsalthough still high are atleast offthe optimistic extremes of early

Nov

Cash- futures arbitrage staging acomeback with INR stabilizing


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Alpha This Week


Volatility measuresCBOE VIX

Exhibit 4:CBOE VIX


The CBOE VIX inched higher for the week even as US equities persisted at theirlife highs; the VIX now stands at 13.7 up from levels of 12.3 last week; it remains

below its 200dma at 14.4

NSE VIX

Exhibit 5:NSE VIX


India VIX has so far taken support at its 200dma and has inched higher over thelast few sessions partly reflecting election outcome uncertainty from the ongoing

state elections

Nifty implied volatility stands at 21.4% now up from 20% levels seen a week ago;it remains above the 200dma which is at 19.7%

Actual realized vols have inched higher too and stand at 20.6% and 18.2% for thelast 12 & 22 day windows respectively

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CBOE VIX

US VIX 200dma

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Nifty IVs

Nifty IVs 200dma

CBOE VIX inches higher even

with US equities persisting at lifehighs

Indian VIX inches higher toofrom its 200dma


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Alpha This Week


India equity flowsWeekly flows

Exhibit 6:Weekly FII and DII cash equity flows


FIIs continued being buyers of Indian equities last week even though the pace wasslower versus the last few weeks

They were buyers of equities worth Rs 13bn for the week while they finished asbuyers of equities worth Rs 70bn for the month of Nov

Monthly flowsExhibit 7:Monthly FII and DII cash equity flows


DII on the other hand have remained heavy sellers amid the FII buying; they weresellers of equities worth Rs 10bn last week

For the month of Nov they have finished sellers of equities worth Rs 91bn

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Flows-Weekly

FII Flows DII Flows

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Flows- Monthly

FII Flows DII Flows

No change in flow picture, as FIIsremain buyers

while DIIs remain heavy sellers


11/12

Alpha This Week


Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking & Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Ankur Rudra, CFA Technology / Telecom / Media (022) 30433211 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal, CFA Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Banking & Financial Services (022) 30433205 [email protected]

Nitin Bhasin E&C / Infrastructure / Cement (022) 30433241 [email protected]

Nitin Jain Technology (022) 30433291 [email protected]

Pankaj Agarwal, CFA Banking & Financial Services (022) 30433206 [email protected]

Pratik Singhania Real Estate / Retail (022) 30433264 [email protected]

Parita Ashar Metals & Mining (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Real Estate (022) 30433201 [email protected]

Ravi Singh Banking & Financial Services (022) 30433181 [email protected]

Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile / Healthcare (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Tanuj Mukhija, CFA E&C / Infrastructure (022) 30433203 [email protected]

Utsav Mehta Telecom / Media (022) 30433209 [email protected]

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

E&C = Engineering & Construction


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Alpha This Week

02 December 2013 Ambit Capital Pvt Ltd Page 12

Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy>5%

Sell

alpha this week an alternative take on markets

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