Many investors have come and asked me to share an example when do you sell. As a fund manager, it is not in the interest of investors of the fund for me to share about when we buy or sell any stock. But once we have executed our decision, most of the time we have shared with you that information.

Yes, we sold all our holdings within NIIT Technologies. Not with the intention that we will never buy again  because it lacks it quality rating. But because of its expensive valuations.

Investing in the IT business, especially with businesses who have a very concentrated clientele like NIIT Tech, Mindtree and Geometric does, the biggest threat to them is losing any one of them. As that loss directly impacts to its underline assets values. This is what happened with NIIT Technologies.

NIIT Technologies have lost its 2 big clients in the USA and that has impacted its margin. There are 16 analysts who look very closely to this business and their consensus estimates for their earnings for this year is rupees 36 per share. Which is in the range of 8-10% to last year’s earnings.

Our 2014 intrinsic values for NIIT Technologies was in the range Rs 268 – Rs 278. With expected low earnings for the year 2015, the expected return on equity for NIIT Tech will fall down to 16% from 20% reported last year. This is not an extraordinary returns that we look in any business. Our portfolio’s returns are directly correlated to the average of our returns on equity of our holdings.

The risk that as an investor we take while investing in the stock market (especially when you are a passive investor!!) we look for at least minimum 20% return on equity and bright prospects with earnings growing every year.

So after doing a bit calculations, we estimated intrinsic values to be in the range of Rs 213 – Rs 218 for the year end 2015. This is an absolute fall of around 20% to previous year’s valuations. And if you believe that prices of underlying assets always follows to its intrinsic values in the long term then it is a laggard to hold those assets in your portfolio whose values had fallen down. But we don’t invest just looking at 6 months expectations. All the other analysts are expecting earnings growth to get normal by 2016, which today translates into 15% growth from the 2015 earnings.

Again, this is not a sign of extraordinary business. NIIT Tech will have to step up and get its earnings growing faster than what is expected. To attract investors they will have to match up their returns with their peers.

Fast forward one more year, we expect the intrinsic values to be in range of Rs 260 – Rs 265 for the year end 2016.

A price tag of Rs 390 per share is a good price to sell this asset rather than buying this asset. There is a more chance of price to fall down another 20% than to rise 20% in a year from here on. It has already fallen down 20% from its recent peak of Rs 486 and it looks long way for it to climb back.

NIIT Tech enterprise value that we calculated in our last post (click here) was the cheapest in its peers and there is a reason. Why HCL Tech and Mindtree are trading at 13 times and NIIT Tech at 8 times? They are in the same business but expected return on equity of HCL Tech is 40% and Mindtree at 28%.

We sold all of our holding in the NIIT Tech but we will keep a very close eye on the earnings of this business as we know that analysts are not always right and businesses are dynamic in nature.