Dec 5, 2000|
Is tech dead?
The stock markets have one striking feature. They tend to overshoot themselves, whether it be a surge or a crash. In a repeat, the markets are now shunning the technology sector, as if all of it was a hoax in the first place.
If you have investments in the technology sector, in all probability you are pretty nervous about the emerging scenario. Ofcourse, if you were influenced by market euphoria, you would probably already have seen the value of your technology holdings erode by anywhere between 50% and 90% from the peak. On the other hand, those that have walked shy of the sector are probably heaving a sigh of relief. But is the present sentiment justified?
Let’s talk about value investing. There is a fair chance that if you were to ask someone for a long-term investment opportunity, the recommendation would be some old economy stock, and probably Hindustan Lever. With over Rs 100 bn in sales and Rs 10 bn in profits, you know the company is for real! Valuations too are said to be attractive, after all the stock has declined from over Rs 300 to Rs 187 presently. But dig a little deeper, and one realises that the argument holds little weight.
Take Infosys for example. Comparing the two makes sense as they both score high on management quality and are considered leaders in their respective sectors. Infosys, in FY00, posted revenues of Rs 8.8 bn while its net was put at Rs 2.9 bn. The company trades at a P/e multiple of 170.5x FY00 earnings. Hindustan Lever, however, trades at a more rational 38.2x. Is that the end of the value argument for a stock like Infosys? It may be for some, but savvy investors need to go a step forward.
One key factor that makes the P/e ratio an inaccurate measure is that while Hindustan Lever is expected to post a 14% (CAGR) topline growth over the next three years, Infosys is likely to grow at a CAGR of 81% i.e. nearly six times faster. We also know that profits will grow equally fast and as a result, the gap in the earnings per share of Hindustan Lever and that of Infosys is only likely to become larger. Indeed, as per our estimates, Hindustan Lever and Infosys trade at a FY03E P/e of 17x and 27x respectively. And that does not seem to be much of a premium to pay for a high growth stock like Infosys. A comparison between Infosys and Hindustan Lever is just one example.
However, just as one can pick a loser in the FMCG sector, so can one in the technology sector. The basic tenets of stock investing, irrespective of the sector, still remain the same: understand the political climate, economy, sector, management and finally the company (in that order). If the factors are favourable, you probably got a winner! So, be it in the FMCG sector, or the technology sector, there is an investment argument in favour and against the stocks. All one needs is to cut away from the ‘irrational exuberance’ that often surrounds the markets and invest in shares that will yield rational returns. Ofcourse, it helps to remember that there is no strategy that will consistently yield you quick returns. So plan accordingly.
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