Famous quotes

"Happiness can be defined, in part at least, as the fruit of the desire and ability to sacrifice what we want now for what we want eventually" - Stephen Covey

Monday, July 30, 2007

another cue on niit

he rupee factor + wage hike did impact the Q1 margins, also a 1 % decline QoQ in volume growth created the 20% decline in profits QoQ, well, it has been a bad quarter for all the IT cos, whether it is Infy, TCS, Wipro or Tech Mahindra or Satyam. The mid cap ones have been hit somewhat more, but then the midcaps also show growths of 20 % QoQ compared to 5 to 10 % for large caps. Anyway, for most shareholders of IT cos it has been a tough time, and their conviction has surely been tested severely. For NIITTech, the last 4 quarters, the consolidated EPS stands at, 6.85 + 8.93 + 11.83 + 8.97 = 36.58, and at a price of 470 it trades at 12.84 times the last 4 quarter EPS. I think this has been the lowest profit multiple for NIITTech for a long time, and the reason is fairly known to everyone, the rupee appreciation has made the IT sector go out of favor, coupled with a bad Q1 has lead to a drastic fall in the profit multiples. For an investor, if u decide to sell NIITTech, you would park your money in some other stock, then compare what profit multiple you are paying against the growth expected. This is called the PEG ratio, for example, a company expected to grow its bottomline by 50 %, and has a profit multiple of 50, then the PEG ratio is 50/50 = 1, the lower the ratio, the better it is, bcoz u r paying less multiple compared to the expected growth rate. For example, considering that rupee does not appreciate steeply in the rest of year as it did in Q1, i still expect NIITtech to have a top line of 1050 to 1150 cr, and a profit of 175-185 cr, which is a growth of 35 to 45 % in the bottom line in FY 07 over FY 06. At a profit multiple of 12.8, u will get a PEG ratio of 12.8/40 = 0.32, which is one of the cheapest PEG, and also the cheapest amongst its peers. Anyway, use this methodology when u shift ur portfolio. In the stock marketet, what matters is conviction, and conviction comes from selecting a good company, and paying the lowest possible price. Both parts are very important, while most people can identify a good company (it doesnt require special skill to know that Infy, TCS are excellent cos in their sector, or HDFC and ICICI are in banking), but it requires a special type of emotional aptitude and fortitude to have the second skill. While many analysts can run discounted cash flow analysis on a excel worksheet, the only thing for a layman investor as per my opinion is to pay as less a profit multiple, and then hold for as long as possible. At some point of time, ur conviction will be tested in every sector, if u look at Bharti\\\\\\\\`s results closely u will realize the consistent fall in ARPU\\\\\\\\`s (Average revenue per user), and the day the growth in user base matches the fall in ARPU, the growth in bottomline will taper of. In Q2, u will see further impact of high interest rates on Banks and real estate. So, at some point in the year, the market will favor some, while some of these will go out of favor. As a investor, u get the opportunity when a sector gets badly beaten up due to some event, and some companies within that sector get a much sever beating than others, and then u buy those stocks which nobody wants. Be greedy when others are fearful, and be fearful when others are greedy-this is the only maxim which works on the market, but it is very very hard to follow, so damn hard that even after so many years i still get sucked into the wrong side, that is being fearful when others are fearful and being greedy when others are greedy, it is battle which will go on forever, but u will improve if u keep at it. Like any other game it requires practice, even Sachin Tendulkar fishes at a ball outside offstump and edges it, when he knows very well that he should leave it, it is something like that, the temptation to hit a ball which you should be leaving. The difference between a Sachin Tendulkar and Vinod Kambli was not talent, it was emotional strength. Take ur call on NIITTech, if u hv identified a better option, relook the PEG ratio and other parameters, get the conviction in whichever stock u r entering, otherwise u will end up paying brokerage fees and commissions, it has been a very tough quarter for IT cos, and i think it will be by the end of second quarter when they may start turning around, so take ur call, if u wish to stick with NIITTech u will hv to broaden ur horizon to atleast another 3 quarters. I hv downsized my targets for end of year for NIITTech, and i think with a profit of around 175 to 185 cr, and a profit multiple of 15 times, it is a market cap of 2800 - 3000 cr, which is a price of approx. 720, of course, there is a potential upside as and when the market turns in favor of IT cos, and in that case, it might go upto 900, but on a safer side, a target of 720-750 by April 08 is reasonable, approx. a return of 60% in 8-9 months fm todays price of 465. Again, lot of assumptions rest in this projection, and do ur own analysis and believe in that, ther is no other way, happy investing!

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