NIIT Technologies: Promoters' exit on cards? - Views on News from Equitymaster

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NIIT Technologies: Promoters' exit on cards?

Feb 22, 2012

The stock price of a company is governed by the fundamentals of the company in the long run. There is no doubt about it. However, some news and events, positive or negative, too have their own say on the performance of the stock in the short term. This is what seems to be happening or is expected to happen with the stock performance of NIIT Technologies, a leading mid-size IT services and products company. As per a leading financial news channel, the promoters of the company are planning to exit the company.

First of all, let us put the matter clearly that as of now this news is just a rumor. The management of the company has not offered any comment so far on this piece of news.

However, this kind of news is bound to raise several questions in our subscribers' minds. And the most important of them would be should they remain invested or exit the counter right away.

Well, at what price the promoters would be exiting if at all it happens is anybody's guess. The news report mentions that they are looking at an EV/EBITDA (Enterprise Value to EBITDA) valuation multiple of around 4 to 5 times EBIDTA (Earnings before Interest, Tax, Depreciation & Amortization). This is below the company's current valuations (Trailing Twelve Month EV/EBITDA is around 5.5).

As such, stake sales are not a bad thing for any company as long as it happens at a good valuation. This at least shows that the buyers are finding good value in the company. In the process, the existing minority shareholders also benefit. There is also a possibility of minority shareholders getting an open offer to exit the stock.

Having said that, since it is still an unverified news, there is no deal on the table at the present moment. Therefore taking any investment action at this stage is not a prudent move. What we can comment on is the intensions of promoters that we have witnessed so far. The promoters have been really pro-investors. They have never hurt the minority shareholders in the past. The company continues to pay handsome dividends over the past several years. Considering all this, there is little possibility that they would take any step to hurt minority shareholders if and when they exit the business.

However, that said, we would continue to monitor all progress on this front and would update our subscribers as and when something concrete surfaces.

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