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23 July 2008

Result Update : NIIT Technologies

NIIT Technologies announced its result for QE Jun 08 on 22 Jul 08.

Geographical spread rose to 52% in favour of Europe while declining by 2% for the US. Orderbook additions were worth Rs 184 Cr in the qtr, with only 43 Cr coming from the US. Vertical wise - the share of Transportation rose to 28 % while BFSI dropped to 42%.

Net profit remained flat at Rs 35 Cr Q-on-Q which translates into an EPS of 5.99 while consolidated revenue rose 7% Q-on-Q to Rs 229.4 Cr. A higher outlay for depreciation and taxation and a reduction in the other income component from 33.21 Cr to 4.9 Cr caused the halving of net profits vis-a-vis QE Mar 08. The Operating Profit Margin remained flat at 19%.

The Trailing Tweleve Months EPS is Rs 22.57 and at the current market price of Rs 112, the stock trades at a PE of 4.96.I maintain a buy on the stock and the target price of Rs 172.

20 July 2008

NIIT Tech Ltd : A Gold Panner's Dream

During Ben Graham's time, there wern't many services companies going around. So that kinda explains the lack of guiding principles from the God of Value Investing for them. I cannot value an IT Services company using His rules directly, however, their greatness lies in universal applicability. Hence if I go by the first principles' approach I could sift through the lot and come up with a few gems (a lot of them, considering the level at which the market is). One such gem is NIIT Technologies Ltd, an IT Services company.

There are a lot of things that I like about this company. However what I like the most is that it is a high margin company operating in very sharp and focussed verticals with appealing geographical spread - something that the indian IT bellweather and its peers have been attempting unsuccessfully for sometime now.

Business

NIIT TECH is present in three main verticals - Banking, Financial Services and Insurance( 44% revenues), Travel, transportation and logistics(25%) and Retail and Manufacturing(12%). The company gets 50 % of its revenues from Europe, 32 % from the US and balance 18 % from APAC (Asia Pacific). Between IT Services and BPO, its revenue distribution is 94 % and 6 % respectively. In IT Services it divides its attention between Application Development and Maintainence(ADM), Enterprise Solutions(Basically SAP) and Infrastructure Management. It also dabbles in GIS through a subsidiary. It has also made a foray in to the Software as Service space and the launch of an IT SEZ in Greater Noida. The depth of its relationships with its clients is judged by the fact that 91% of its revenues were a result of repeat business.

Fundamentals

On a consolidated basis, it did a business of Rs 956 Cr and earned a Net profit of Rs 135 Cr. Not bad considering that the complete company is available for a market capitalisation of Rs 646 Cr. (Mkt Cap to sales of 0.687 at a stock price of Rs 110). What it actually means to me as a lay investor is that keeping other things the same, my investment in the company would yield a return of 15 %. And if the company grows faster than the current rate, the Return on Investment would be higher. To top it all, it had a net cash flow of Rs 66 Cr.

Valuation

Oh! Dont get me started on that one!! At the current market price of Rs 110/- the FY 08 Diluted EPS of 23.02 times gives a PE of 4.79 . The trailing twelve months EPS of Rs 26.84 gives a PE of 4.1. And this from a company which has an average growth rate of 61 % over the past four years. ie PEG of 7.8. So even if the company grows by 10% over the next 1 year, I suppose the stock should be available for at least Rs 268! But that is too simplistic.

However by both the Free Cash Flow to Equity and the Dividend Discount Models at a cost of equity of 17.4% and a growth rate of 10%, the stock price works out to be Rs 172, a decent upside of 56%!

10 July 2008

Ador Welding Ltd : Research Report – Initiate Buy

Summary of the Sector and The Company

Ador Welding is a leader in welding solutions providing arc welding and continuous welding electrodes, welding equipment and accessories. It has clients in high growth sectors like defense, ship building, power(nuclear, thermal and hydro), auto, general and heavy engineering, petro chemical and fertilizer plants. Almost all of which are related to the infrastructure sector.

Automatic welding (welding solutions), in India accounts for only 20% of the domestic market as against almost 60% in developed countries. This share is expected to improve, firstly due to the expected expansion in the infrastructure sector and secondly, as more and more Indian companies are likely to resort to automatic welding to achieve greater efficiency in their operations. Ador Welding with 400 distributors and 250 technical representatives therefore has the elements in place so as to be able to play a major role in this growth.

Fundamental Aspects

Amongst its peers the company has a low Price Earning Ratio(8.49) and an amazingly high dividend yield of 6.64%. It is a debt free company with a market capitalisation of Rs 192 Cr and a Return On Equity of 17.96%.

The stock is currently trading at Rs 141/- and we see it as undervalued by Rs 30 . The true value of the stock is Rs 171/- which translates into a return of 21.3%. This is the value of the arbitrage opportunity available in the stock. Any growth in the sector and company would result in a concomitant higher valuation.

03 July 2008

MY BARBER TELLS ME.....

I went for my triweekly haircut to the barber and while waiting for my turn I sat browsing through a pink paper. And as is the wont of the tribe of barbers(hairstylists?) he struck up a conversation with me using the pink paper as an opening gambit. "There was a lot of money to be made in the stock markets but that time is past. Now if one enters the market, one does so with the specific intent of losing ones money! For I dont see any other reason for doing so."On the way back it stuck me that such was an opinion voiced by all and sundry; be they on the boob tube or in the street or even in the papers.


Within six months had we gone from being the destination of choice for global money to being an economic equivalent of 'Ramu Ki Aag'? Was our economic ecosystem so fragile as to collapse under the weight of rising inflation (spurred by the rise in commodity prices incl oil)?Being the eternal optimist I do not agree with this hypothesis. However optimisim without the support of reason is irrational exhubarence. So what is my rationale for the optimisim?

The demographics of India itself can sustain many a sector. The low levels of penetrationshould be seen to be believed. Teledensity - less than .1%. Two wheelers - less than .05%. Education, energy, clean drinking water, roads, healthcare, governance.......I could go on and on. We all know of these ills. Let us look at them as opportunities. The opportunity is there but there arnt many who are taking advantage - for varying reasons (more of that later). So we need to perhaps sift a little more closely here - looking for gems which could help us ride this downturn and take us closer to the crest in the next wave. I bet on water and healthcare. I bet on life itself. Like the Oracle of Omaha famously said, " People gotta eat and drink".

They also need to survive.

Meanwhile I shall follow the obverse side of the market rule of thumb - 'sell when your newspaper seller starts recommending stocks to you'.

Well, my barber tells me .....

DISCLAIMER

This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.