July 24, 2008

Responding to comments - NIIT tech valuation

I have posted on NIIT tech earlier here. I had done a quick back of the envelope calculation and uploaded the same in the google groups – see the file valuationtemplatev3NIITtemp.xls. I have been asked on the logic of the valuation via comments and emails. So here goes,

Following are the assumptions in the valuation
- Topline will grow by around 10% per annum for the next 2-3 years
- PBT margins will drop from 17% to around 10% in 2-3 years
- New tax rate will increase from around 15% to 25%
- Net margins will drop from the current 14.5 % to 7% due to the above factors.

I personally think, the above assumptions are very conservative. It is possible that the company can do worse than this, but based on current facts, I think that is a low probability.

So based on the above assumptions the net profit for 2010 is around 90 Crs. I have taken a multiplier of 14 and added the cash on books to arrive at a rough valuation of around 1550 Crs (I have also added the pending options to the share count).

To see what a PE of 14 means, please look at the spreadsheet
quantitative calculation – worksheet ROC and PE. Look for the DCF calculation with ROC of 25% (approximate ROE for NIIT tech). A growth of 8% for 3-4 years gives a PE of 14. So I am talking of a growth of 7-8% in profits after 2010.

The valuation is dependent on the assumptions above. Ofcourse these assumptions are not set in stone. If the US market goes into a deep recession or the management does something very negative, then the netprofit could be lower than what I have assumed. If you believe that the market is pricing NIIT tech correctly, then your underlying assumption is that the company is going to fall off the cliff in the next 2-3 years (basically shutdown in the next 3-4 years).

Based on the past performance and this quarter’s result, I don’t see any reason to believe that. However I can and will change my mind if the future invalidates my assumptions. So as I have said before, please do not consider my analysis as a recommendation for the stock.

As an aside, I have received the maximum number of emails and comments on this stock. Its not too surprising as a lot of readers of this blog are from the IT industry and tend to invest more in IT stocks.


VISHNU said...

Hi Rohit,

One more thing I have noticed : whenever you are write about Individual Picks , you are getting lots of comments.

Less comments for the writings on strategies , valuations...

One request:I am looking for 1998 AR of Kiroloskar Oil engine..Can you send it to me (if you have)?


Rohit Chauhan said...

Hi vishnu
true. i guess it because stock picks are suitable for discussions , whereas strategies, valuations are more closed ended topics

i dont have 1998 AR for kirloskar oil. The earliest one i have is for 2003


Vijay said...

Hi Rohit,
I listened to the analyst call for the Q1FY09 results.
There was one question by the first caller regarding the growth outlook..
[http://www.niit-tech.com/investor/amj08-09/NIIT%20Technologies%20Q1%20Concall-1.wma : 23rd minute]

The management did not give out numbers, but they mentioned that we could expect the company to move along this growth trajectory.( YoY (revenue?) growth for Q3FY08 1%, Q4FY08 4%, Q1FY09 7% yoy )

This is less as compared to the large players who are growing at around 20%. Probably this is one of the reasons that people are not willing to pay more for this company?

btw, Room solutions contributed to 27 Cr in Q1FY08 Revenues.

Rohit Chauhan said...

Hi vijay
the growth and overall performance definitely inferior to tier I companies. however the valuation gaps is much much larger than that. Tier I companies still sell at 15+ PE, compared to a PE of less than 5 here.

A valid counterargument can be that the Tier I companies deserve the premium valuation and in the long run will give better return than average performers like NIIT tech. personally i dont know ...i am looking at NIIT tech on absolute basis and finding it cheap

But in the IT business things can change dramatically and i may end up changing my mind

sajan Mathew said...

Dear Rohit

Have you looked at NIIT Ltd ? NIIT Ltd has been beaten down to a market cap of 320 Cr and owns 25% of NIIT Tech.
It is Asia's largest training company and will possibly do over 1000 Cr sales.


Rohit Chauhan said...

hi sajan
i have not looked at NIIT .but in this market, it could very well be undervalued