IT stocks trade at heavy discounts

Jai Kumar NR & Nitin Mathur

New Delhi, Sept 20: There seems no respite for cyber investors as technology stocks are now trading at a hefty discount of up to 87 per cent to their book values. The book value, which is generally reckoned as intrinsic value of a stock, is low in an IT company as compared to its old-economy counterpart. This indicates the intensity of hammering these stocks have undergone in the recent past.

The price-earning multiples have virtually become meaningless for these stocks as many of them are trading at P/E levels of 0.9-3. To top it, as many as 11 technology stocks in the A-group are currently trading at 10-87 per cent discount to their book values. The list includes some of the erstwhile IT hot bets like Himachal Futuristic (HFCL), NIIT, Global Tele, Pentamedia Graphics and Silverline Technologies.

The unabated offloading, especially after the attacks in the US, is understandable as most of these companies generate a sizeable portion of their revenues from the markets there, brokers say. There are fears that the terrorist attacks may trigger a recession and as many as 17 US companies have already issued profit warnings.

The National Association of Software and Services Companies (Nasscom) has recently confirmed some of these fears as it admitted that the US developments will have an impact on the second quarter results of IT companies. Even before the present crisis, the market was wary of the IT companies due to fears of a recession in the US economy. Many of the Indian IT companies had projected a lower profit growth of around 30 per cent.

According to a Delhi-based broker: “Unlike the old-economy companies, software firms do not need large asset base to operate and so their book value is lower. If these companies are trading at price lower than their book values, it shows on the capability of their management and the prevailing economic condition.”

Pentamedia Graphics, which currently quotes at a ridiculously low P/E of 0.9, is trading at 87 per cent discount to its book value of Rs 260. The stock was also quoting close to its 52-week low of Rs 29. HFCL, with a PE of 0.9, is another disappointment which is currently hovering at around Rs 34. This is at an 81 per cent discount to its book value of Rs 180.