HCL Tech at its 52 week low: Is it a great buy?

Of course, YES.

I can’t say anything from technical approach but fundamentally, it’s a great buy.

Don’t worry, I’ll prove it.

The reason behind such a great downfall in price is due to below 3 reasons as per economic times:

  1. The slowdown in the company’s infrastructure services business that contributes around 36% to HCL Tech’s revenue.
  2. The company’s margin contraction— margin has contracted in the January-March quarter compared to same period last year.
  3. Investor sentiment has also taken a hit because of the management’s decision to stop giving margin guidance.

Another great concern is reduction in its EBIT margin:

Financial Express has cleared out the main concern of the stock as a low EBIT margins. Notably, the stock has highest margin among its peers but this reduction has affected the company’s price at a great extent.

From the very first quarter (Jan-Mar), company’s profit declined due to low EBIT margins. You can easily locate out the drop in price since last 1 year:

From above 1,000, it’s now below 750. A drop of around 25% in just one year.

But the question is weather the current market price of the stock is justified & Is it the great pick at its current price?

Of course, YES.

Company is valued at lowest among its peers.

Having a highest Earning Yield. It’s a great factor for comparing CMP with its earning as per the great value investor Joel Greenblatt.

PE is lowest among the others. Another good sign.

All other return ratios (ROE, ROIC, ROA) are just awesome and ranked second after Tata Consultancy Services (TCS).

Interest coverage is also highest and dividend yield is ranked second after Oracle Service.

Its enough to conclude that its a wonderful company at wonderful price.

Sales are also showing a growth trend since its inception:

Another question: The stock had already dropped to 52 week low couple of months back, now, it’s trailing around low and what if, it further dropped more?

Couple of months back it was trailing around 800 (and it was also it’s 52 week low at that time) but that price compared to its fundamental is average. Many factors bound to CMP (like PE, earning yield etc) had absolutely been changed to average with the fluctuation in price. And that factor are showing positive sign at its current price.

And it is also possible that the stock further might declined more than its current price but that’s not a matter of concern. WHY?

Because if the stock dropped more in future then what the true value investor will do?

Definitely, he will invest more in this stock. It’ll will be hard to invest in a stock dropping down but that’s why value investing trend is rare and profitable.

It will give you more bargain opportunity to buy the shares with great margin of safety. It’s good to buy a 100 Rs product for 80 Rs but its better to buy its for 60 Rs. Both the deal are profitable but the second one is more profitable which in turn increase the Margin Of Safety, (MOS is a concept well explained by Benjamin Graham in Chapter 20 of his book Intelligent Investor).

Well said by Benjamin Graham:

[bctt tweet=”Stock market is a voting machine in short run and weighting machine in long run.” username=”sowmay_jain”]

In 2–3 quarters this stock might not show any positive price trend but in long run, this stock might outperform the market. So just wait for long if you really want to get benefited from this stock. Well said:

“No matter how great the talent or efforts, some things just take time: You can’t produce a baby in one month by getting 9 women pregnent.”

And also consider that quarter results don’t decide the companies future. Same thing happen with ICICI bank in Jan-March quarter but its recovered in couple of months from its 10 year low:

Now’s its among the top gainers on almost all trading days.

Here’s a strategy that you may like to invest in invest proportionately:

Don’t invest full amount in this stock. Invest 30% to 50% of what you would have invested.

If the stock price further decreased in current trading period, invest another 30% on next trading period and so on.

If the stock price increased then it’s a positive sign of market sentiments towards the stock. So invest all of your remaining amount.

Fundamentally, it’s a good buy but by technical approach I can’t say anything.

That’s what I think about this stock but still I don’t own your money, so any risk arising from taking actions will be your responsibility 🙂

Would like to hear your opinion in comments?