Saturday, March 18, 2006

News, prices and tale spin - Visualsoft Tech

Visualsoft Technologies Ltd. made a press release on the 17th of March, 2006 stating that - they are no longer going ahead with the amalgamation of the two other pvt companies with Visualsoft Technologies Ltd. Another relevant info in the same news item was - Mr. Sashi Reddy has resigned as the CEO of the company.

The charting below shows the performance of the stock.


The stock price has taken a serious dent from it's Jan4th levels of 260 rupees and is today almost 50% below that price. Notice the strong volume of 1.75 million on 17th March 2006 because of the news that the amalgamation has been aborted and the resignation of the CEO of the company. On that day, the stock fell from 162 rupees to 138 rupees.



Financially, the specs of the company are enclosed -

Share capital - 19.98 crs
Loans - 0.00 crs
Investments - 0.00 crs
Net current assets - 154.10 crs
FV - 10 rupees per share
Dividend - 2.50 rupees per share
CMP - 138.65 rupees per share (17-Mar)
LY profit - 28.34 crs

Lets make some inferences from this -
1. NCAV for Visualsoft Technologies is a fantastic 77.13 rupees/share (the CMP less than 2x of the NCAV)
2. Cash with the company is 54 crores i.e. 27.02 rupees of cash per share
3. Zero debt company (cash rich - zero debt is a lethal combination !!!)
4. Dividend yield would come to 1.79%.

Now the problem areas -
1. While sales in Q1 and Q2 increased by 14% and 15% respectively over last yr, the Q3 sales actually dropped by a huge 41% over last yr
2. Profits for Q1 fell by 24% over last yr, for Q2 fell by 6% over last yr and for Q3 fell by 41% over last yr
3. Estimated profit for the year is only 19 crores for the company which means a P/E of 14.72. (a P/E of 14 is available with other peers aswell who although donot have this fantastic NCAV that Visualsoft holds, but have more stable earnings)
4. The profits are well below my 10 crs per quarter rule.
5. and ... I have the slightest idea how the stock will behave over the next 3 days.

Mar-17 saw huge volumes on this counter and massive decline. March 20th can be a make or break. Amazingly, this is the same company which was listed in Forbes as one of the Top 200 Small Companies in the world.

Questions for you -
a) Is Visualsoft under / fairly / overpriced at rupees 138.65?
b) Will Visualsoft go further down in price over the next week or so? If yes, how much? If not, why not?
c) Is there some appreciation to be seen in the price of the stock over the next 3 months / 1 year from today?

An additional question - investing in which stock is preferable ... a Visualsoft which has a great NCAV but sparse earnings record or an NIIT Technologies which has no NCAV but a consistent and growing earnings record?

10 Comments:

Blogger Prasanth said...

NIIT tech is a better bet. Somehow, NCAV method does not look right with these tech companies.

8:14 AM  
Blogger Shankar said...

Interesting point on the NCAV not applicable to IT companies, Prasanth.

.. I examined various financial ratios in three large cap IT companies (Infosys, TCS and Wipro). This was to arrive at common features in IT cos or 'the DNA in a blockbuster IT company'

Infosys:
OPM - 33.91
NPM - 27.28
D/E - 0.00
Current Ratio - 2.8
P/E ratio - 32.61
Div Yield - 0.40%
Cash/share - 54.85
P/BV - 14.81

TCS:
OPM - 25.64
NPM - 20.45
D/E - 0.01
Current Ratio -1.54
P/E ratio - 35.13
Div Yield - 0.96%
Cash/share - 7.63
P/BV 7.47

Wipro:
OPM - 29.91
NPM - 22.63
D/E - 0.03
Current Ratio - 1.77
P/E ratio - 27
Div Yield - 0.61%
Cash/share - 7.61
P/BV - 26.97

Notice that the ratios directly related to balance sheet items such as current ratio, cash/share and P/BV have significant variations as compared to profit&loss related items such as P/E ratio, dividend yield, OPM and NPM. (The debt/equity ratio is the only exception to this rule, where all three entities had most similar numbers)

When put to the ultimate test, I find that Infosys has grown by 28% in exactly 1 yr, TCS surprisingly as also grown by 28% in exactly 1 yr while Wipro has grown by 52% in 1 yr.

To conclude: I'll agree with Prasanth that NCAV has a lower impact to IT stocks and the P/E ratio and allied ratios had a greater contribution to the true determination of value

Warm Regards
Shankar

8:29 PM  
Blogger Shankar said...

Oooops ... i got the spelling wrong. It's tail-spin and not tale-spin.

8:32 PM  
Blogger Ravi Purohit said...

Hi Shankar,

Wouldn't looking at the PEG ratio make more sense for an IT company. Or rather isn't this a more informed guesstimate of the value to be attached to an IT company.

There is really no other way of analysing or valuing IT companies. More so if the IT sector does not fall into one's circle of competency.

-
Best regards,
Ravi.

11:07 PM  
Blogger Shankar said...

No idea brother. IT and Banks really puzzle me. And add the shipping industry to this list ... most shipping stocks like SCI, GE Shipping, Mercator are below a P/E of 6 and yet hardly anything moves ... ???

11:50 PM  
Blogger Rohit said...

Hi shankar
Shipping industry has a very high operating leverage. They have high fixed costs and low variable cost. so when there is an upturn in business, the earnings shoot up and PE come down. vice versa would happen when the business climate is bad. So PE is not a very measure to evaluate shipping stocks. also one has to look at the normalised PE (PE over a complete business cycle).
For banks, i think P/B ratio is a much better ratio to look at.

9:17 AM  
Anonymous Anonymous said...

Shankar,
I do not understand NCAV properly. Could you explain it in more detail.
Thanks.

6:10 PM  
Anonymous Anonymous said...

Shankar,
Sorry I was not correct initially. I do not understand NCAV at all. It would better if you could give more details.
Thanks.

6:11 PM  
Blogger Shankar said...

Hi,

NCAV per share is a simple formula ... (Current Assets - All debt) divided by (shares outstanding)

Benjamin Graham used this formula rigourously to find undervalued stocks.

Warm Regards
Shankar

9:59 AM  
Blogger Tagad_Tale said...

Visualsoft also has a huge bank of land in Vizag (~100 acres). This can fetch them a very tidy sum of money when they liquidate the investment.

11:13 AM  

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