Software valuations: Low or high? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Software valuations: Low or high?

Dec 13, 2002

Post the recent run up in technology stocks, Infosys is trading at a P/E multiple of 34x, while Wipro is trading at a P/E of 39x. Many investors are hesitant to buy these stocks at these levels due to the P/E multiple being over 30x. However, avoiding the stock based only on this reason may not be correct. There are many other things that need to be considered. Why such high P/E?
Empirically, the P/E multiple reflects the earnings growth expectations for the next fiscal. Thus, if the markets are valuing a stock at 18x, they expect the earnings to grow by 18% the next fiscal. Thus, valuations for Infosys and Wipro point to expectations of strong growth in earnings, on the back of increased interest in offshore outsourcing. Unfortunately, only death and taxes are certain, outsourcing deals are not. If due to some unforeseen reason, the outsourcing order flow stops, then these stocks are likely to take a severe beating on the bourses. And valuations could revert back to 20-22x. Therefore, while investing at such high valuations, if the time frame for investing is short, the element of risk increases considerably. Consequently, it is advisable to invest with a long-term perspective (three to five years).

Company CMP (Rs) EPS (FY03E) P/E (x) FY03E EPS growth
Infosys 4,788 143.5 33.4 17.6%
Wipro 1,620 41.5 39.1 3.6%
HCL Tech* 190 16.6 11.4 10.0%
Satyam* 283 14.1 20.1 17.5%
Digital 622 32 19.5 12.9%
Mphasis BFL* 692 41.3 16.8 63.8%
* Consolidated numbers

Company specific risks
Also keep an eye out for company specific risks. Wipro P/E multiple is based on the company's low float. What if the management decides to offload a significant part of its holding in the markets? Even if the P/E declines to what Infosys trades at today (34x), investors will see the share price decline by 14%.

Low P/Es?
Traditionally in boom times, it has been seen that super growth stories mushroom overnight. These rosy projections make it seem that stocks are trading at relatively low valuations be it P/E or PEG ratios. But please do not get swayed by the noise around you. While many ideas are genuine, running a business is very, very difficult. First understand the company's business model, check out its historical financials and growth prospects, and finally establish management credibility. Only then can you gauge whether the valuations of a particular stock are justified or not.

Equitymaster requests your view! Post a comment on "Software valuations: Low or high?". Click here!

  

More Views on News

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE IT


Dec 1, 2021 (Close)

S&P BSE IT 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS