The shares of IT software and services company NIIT Technologies Ltdhave been drubbed in the past year due to lacklustre financial performance, belying hopes that the surge in revenues and profit in the fiscal year 2006-07 would be sustained.
Its consolidated revenues fell 5.8% sequentially in the June quarter, were flat in the September quarter and rose by 1.7% in the third quarter. Operating profit growth was worse, marking a decline of 20.4% in June, and rises of 0.2% and 4.2%, respectively, in the next two quarters. Given the backdrop, the sequential revenue growth of 6.3% in the March quarter seems decent. Operating profit growth was marginally lower at 5.2% as margins fell by about 20 basis points.
The company has provided for a mark-to-market loss of Rs6.7 crore for its forex transactions, as a result of which net profit fell by 10.7% sequentially. The markets don’t seem worried about the forex loss, and are focusing on the improvement in operational performance last quarter. Its shares have jumped by 16% since the company announced its results on Wednesday.
Besides the increase in revenue and profit growth rates, the company also announced a jump in fresh orders to $81 million (around Rs348 crore today) in the last quarter. In the December quarter, orders stood at $59 million, up from $49 million in the September quarter, and $41 million in the June quarter. But note that there seems to be a seasonality about fresh order intake, since in the March quarter a year ago, it stood at $72 million. The executable order book stood at $113 million, about 10% higher than $103 million a year ago.
The recent improvement in the fortunes of NIIT Tech shareholders—the shares have risen 65% from lows of Rs86 in March this year—comes from an extremely low base. The stock has fallen from Rs375 in October last year. Even after the recent rise, the company is valued at just six times of past earnings.
The current valuations seem fair considering earnings grew by just 5% in the year to March. What’s more, losses related to forex hedges may only mount in the near future. If the company reported mark-to-market losses of Rs6.7 crore at the rate of Rs40 a dollar at the end of the March quarter, its losses would increase if the rupee remains at current levels of about 43 to a dollar.
The company has hedged $236 million, which is as high as its annual revenues. Investors excited about the slight improvement in performance in the March quarter need to be mindful of this risk.
Boston Analytics: market trends for May
Equities research firm Boston Analytics’ India stock market diary for May highlights some interesting market trends.
They sort their index universe on the basis of market capitalization, rice-to-book (P/B) value, three-months momentum and economic sector. Each of these segments is then further divided into 20 portfolios. For instance, the universe of stocks sorted by market capitalization is then divided into 20 portfolios depending on how much the companies’ market cap is. Portfolio 1 consists of the 5% of companies with the largest market cap, while portfolio 20 consists of the 5% of companies with the lowest.
Interestingly, the highest returns in the last 12 months have been given by the companies in the 20th portfolio, or the smallest firms. These firms’ 12-month return is 71.38%.
Generally, the portfolios in the bottom half, or the smaller firms, outperformed the market over a 12-month period. However, the reverse is true if returns are taken year-to-date. Simply put, volatility is much higher for the small-cap firms.
However, all the portfolios posted negative returns in May. The portfolios in the bottom half (smaller firms) outperformed the market by a small margin of 0.42%. The top half of the portfolios underperformed the market by a small margin of 0.38%. While small firms did well when the market was moving up, they are likely to do much worse now that the market is moving down.
Boston Analytics has also sorted its index universe on the basis of valuation, taking P/B value as the criterion. However, despite the market correction, value stocks in the lower portfolios, or those with lower P/B ratios, underperformed the firms with higher P/B value.
The verdict: “current investor sentiments were indifferent to higher book value stocks”.
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