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.
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.
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.
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%!