Most of the big IT companies had come out with their second quarter and half yearly results. We had seen weak and negative numbers from most of the companies and are petrified will erase companies’ intrinsic values this financial year.

We are also watching closely this sector for any opportunities available to invest. Many IT firm’s stock prices had declined in range of 15% – 25% in the past 2 months and many value investors might assume that value has emerged and it is a good time to buy and add them in their portfolio. Many times when stock prices fall down does not mean they are getting cheap. The fall in the stock price could be possibly due to fall in its earnings expectations and market is re-adjusting its valuations on that new information available to all. Value investors are familiar with those conditions as ‘value trap’.

So is there any ‘value trap’ in IT sector?

Intrinsic values of the business changes as new information is out publicly. It is important to keep track of valuation spectrum regularly to avoid those ‘value traps’. We shared 10 IT businesses valuation spectrum last month and many out of them had reported so far their quarterly results. With the new information available now, Valuation spectrum had also changed like their stock price. So here is the updated valuation spectrum of these 10 businesses as of 21st October 2016.

Companies 2016 Profits 2016 – IV Expected 2017 – Profits Expected 2017 – IV Spectrum/share Stock Price
HCL TECHNOLOGIES Rs 5,605 Rs 404/share Rs 7,708 – Rs 8,456 Rs 703 – Rs 847 Rs 814
Tech Mahindra Rs 3,159 Rs 364/share Rs 2,989 – Rs 3,673 Rs 304 – Rs 455 Rs 435
TCS Rs 24,375 Rs 2,280/share Rs 25,308 – Rs 27,503 Rs 2,173 – Rs 2,589 Rs 2,414
Eclerx Rs 363 Rs 1,685/share Rs 340 – Rs 443 Rs 1,108 – Rs 2,007 Rs 1,638
Zensar Technologies Rs 312 Rs 681/share Rs 306 – Rs 348 Rs 545 – Rs 706 Rs 987
Infosys Rs 13,678 Rs 733/share Rs 13,621 – Rs 15,342 Rs 619 – Rs 763 Rs 1,038
Wipro Rs 8,941 Rs 438/share Rs 8,092 – Rs 9,866 Rs 326 – Rs 482 Rs 480
NIIT Tech Rs 297 Rs 372/share Rs 220 – Rs 287 Rs 200 – Rs 325 Rs 428
Persistent Rs 297 Rs 376/share Rs 298 – Rs 338 Rs 287 – Rs 357 Rs 659
Mindtree Rs 603 Rs 428/share Rs 440 – Rs 602 Rs 197 – Rs 325 Rs 458

 

These changes in the valuation spectrum depends on changes made by analysts in their earnings expectations. We still think valuation spectrum for Wipro and Mindtree will change further as analysts will update their earnings this week after looking at results of late last week.

Important information: intrinsic values of all the businesses change as new information comes out. But they do not change as fast as the price of the stocks. In the long term, data shows that price always follows the intrinsic value of the business. Investors do not invest only looking at 2017 valuation spectrum. As almost half of the financial year had past, many might be investing looking at the 2018 valuation spectrum.

If you are interested to know valuation spectrum for 2018 then please leave your comments below and I will be happy to share them with you.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.