February 4, 2010

Quarterly result review

Lakshmi machine works
LMW reported
Q3 results recently and overall the result are as expected. I have analysed the company earlier here . The company had a terrible 2009 and reported an almost 60% drop in profits. This was expected in view the recession in all the developed countries.
The topline growth and the profits have now started recovering and are back to around 50-60% of the pre-crisis levels at around 30 crs per quarter. It will ofcourse take a longer period (I don’t know how long) to reach the pre-crisis levels and surpass it. Overall the company is performing as I thought it would.

You can find the detailed analysis here – look for the file valuationtemplatelmw.xls. Finally, I think the intrinsic or fair value of the company has remained unchanged.

IT results – Infosys, NIIT tech and Patni
I have a holding in all of the above companies, though I have been cutting the position size for some time now. Most of the IT companies have declared their Q3 results and it has been mixed bag overall. I am reviewing the result for the three companies I hold.

Infosys had a small drop in the topline (1%) and and similar drop in the bottom line. They have reported a small (around 8%) growth in the net profit for the first 9 months of the year. The company has almost 13000 crs of cash on the books and continues to earn a high return on equity and a much higher return on tangible capital (building , receivables etc). The company has given a guidance of a small growth for the rest of the year and has yet to give a guidance for 2010. The stock price currently is discounting some growth for the next few years. My own estimate of fair value is around 2600-2800 and hence I have been reducing my position in the stock.

NIIT tech reported a 7% drop in topline on YOY basis and 2% increase on QoQ basis. The net profit went up by 10% on QoQ basis and doubled on an annual basis. The increase has been mainly due to reduction of the hedge losses. If one were to eliminate the impact of the hedges on topline and bottom line, the revenue and net profit are more or less flat. The company has reduced the impact of the hedges on the balance sheet and in the investor call have indicated that they will keep a limited currency hedge going forward – some return of common sense there. The company expects moderate growth going forward. I have also revised the fair value of the stock upwards by around 10%. My personal estimate of fair value for the stock is around 240 rs.

Patni reported results which are in line with that of the industry. It reported a 3.3% growth in topline on QoQ basis and a 8.9% drop on Yoy. The net profit dropped by 17.2 % on YoY and now stands at around 171 crs. The company should be able to deliver to deliver around 500 crs in terms of net profit in 2009 and carry around 2000 crs of cash on the books by the year end. The company also completed a successful buyback during the early part of 2009 at an attractive price. The company results are not great, but more or less in line with the industry and as per expectations. I have revised the fair value of the company upwards by around 5%. My personal estimate of fair value for the stock is around 530.

I think on an overall basis, the IT companies I hold have performed as per expectations. In addition, they are now showing signs of growth for 2010. At the same time the valuation of these companies reflects that and more. As a result the stock price for most of these companies is now much closer to the fair value and I have started reducing my position size as the prices keep rising.

Container corporation of India (CONCOR)
The company reported a 5% growth in topline in the current quarter and a flat bottom line. The company has achieved a 10% growth in topline for the first 9 months and 5% drop in the profit for the same period. The company has two business segments – exports and domestic. The company provides containerized transport for exported goods, mainly out of ports and also provides for domestic transport of goods, mainly through rail services. As expected the export part of the business has shown a drop in profitability due to the slow down. The company has been able to reduce the impact by improving the performance of the domestic business.

CONCOR is a great business with enormous competitive advantage, conservative and good management and good growth opportunities. The company should start growing again once the export business recovers. The company however is not cheap and sells close to its fair value.

Additional note : I am not buying any of the companies reviewed in the post. If however the stock price keeps rising, I may start reducing my positions further.

9 comments:

Ravi said...

Hi Rohit,

Very good rational review of the results. I do hold Infy and NIIT Tech. However, I have sold CONCOR completely. My rational is that CONCOR is in a business wherein the only way to increase topline is to invest more capital which is ok. However, there are 8 more providers that are now coming into competition. They will have to match the competition in service and delivery which I am not sure how it will play out. The reason I sold was it is fairly valued based on my expectation of free cash flow in the future and thre is a significant risk of not maintaining that growth that I have projected due to increased competition as it is no more the monopoly it was before.

Regards
Ravi

Lucky said...

Hi Rohit,

I hold Infosys and NIIT Tech... should have bought Patni too :(

I feel very same about the valuations. Have started rebalncing both (@2600, @200 respectively) though infosys is much longer term holding.

It is surprising that I arrive to almost similar (~5% smaller) values without doing DCF calculations. Got a hint from TII :-)

I have been wondering why you never discuss any banks or financial institutions...

Rohit Chauhan said...

Hi ravi
agree there is more competiton for concor. i think the company will still do well as its competitive advantages are still big and it is not easy for the new entrats cannot achieve the same scale easily ..CONCOR has a headstart which is not easy to overcome
the main issue i think in case of CONCOR is valuation ..i agree CONCOR is now fairly valued

rgds
rohit

Rohit Chauhan said...

Hi lucky
what is TII ? i think it is not mandatory to do DCF ..other approaches are fine too ..i think DCF is a more robust approach and allows you to do scenario analysis and look at a range of values.

no specific reason for not discussing banks or financial institutions ..i have done in the past and you can search for it on the blog ..no discussion now as i dont hold any financial instution

Lucky said...

The Intelligent Investor. I guess the acronym wasn't that obvious. Or Graham is not so popular in the bull-run?

I agree that DCF is more robust. But that is better left to the experts like you.

BTW, you did not respond about the the work you wanted me to do. You got alternative proposals?

Anonymous said...

Hello Rohit,

Can you recommend any reading materials/books on how to do a DCF analysis for a company? Im a beginner in this aspect, so any other pointers/tips that you can give me would be very helpful.

Thanks in advance,
Ameet

Rohit Chauhan said...

Hi lucky
yes , DCF is time consuming ..but does not require too much expertise ..it also forces one to think and avoid shortcuts.

i am sorry ..my memory is weak ..can me remind me what work you are referring to ?

rgds
rohit

Rohit Chauhan said...

Hi ameet
i dont remember the books i used to learn how to do DCF as it has been a long time ...pre-internet days :)

you can actually google the term and i think you will get enough free material to learn about it

rgds
rohit

Rohit Chauhan said...

Hi ameet
i dont remember the books i used to learn how to do DCF as it has been a long time ...pre-internet days :)

you can actually google the term and i think you will get enough free material to learn about it

rgds
rohit