Buy Infosys, target Rs 1386: Hadrien Mendonca
Today marks 25 years since Infosys, the marquee IT services company in India, started trading on the stock exchange.
This is being treated as a landmark by most media outlets because the general consensus is that Infosys, more than any other, is the Indian company that changed the way India Inc. did business. As The Economic Times put it, “Democratisation of wealth creation suddenly looked cool.”
It took computer nerds to infuse some cool into wealth creation in India. Let that sink in.
For those who are unaware of Infy’s creation story, it was started in 1981 by one Mr Narayana Murthy, along with six other engineer friends in the city of Pune, all former employees of Patni Computer Systems, with a capital of around 10,000 rupees borrowed from Murthy’s wife Sudha. We could safely assume her loan was since repaid. Which would make us wrong.
According to wife Sudha, Murthy was always broke; he always owed her money. "For three years, I maintained a book of Murthy's debts to me. No, he never returned the money and I finally tore it up after our wedding. The amount was a little over Rs 4,000," she wrote, recalling the initial days. 12 years later, Infosys made an initial public offer in February of 1993. In June 1993, its shares were listed on Indian stock exchanges.
One Moneycontrol reports recounts that while the issue price was Rs 95, trading began at a premium of Rs 145 per share. That’s a 60% premium. In the same year, Infosys became first Indian company to introduced employee stock options. At the time, the company had a gross revenue of $5 million, with a workforce of 250 employees, a far cry from today’s workforce of more than two lakh employees worldwide.
However, it wasn’t all smooth sailing for Infy’s stock market debut. Its Rs16.5 crore IPO was undersubscribed. Investment banker Enam bailed out the company while Morgan Stanly picked up a 13 per cent stake in the company.
The company’s shares ended business on listing day at Rs160. As of yesterday, share price touched a record high of Rs 1,284 on the BSE, surpassing the previous high of Rs 1,278 on June 3, 2016. The company has outperformed the market this year, surging 23% compared to a 5% rise in the S&P BSE Sensex.
Infosys also did business differently, as we’ve noted earlier. The Economic Times explains that Infosys' disclosure standards turned out to be an immediate hit.
Other companies followed suit. Its whistle-blower policy, norms on insider trading and an independent board panel were all lapped up by the industry and the markets. Their management culture was more democratic too. The senior management didn't have any separate canteen, lifts or even restrooms. Good fellas, the Infosys founders. Thanks to Infy’s Esops, many of its employees with shares are now dollar millionaires.
The company was also upfront about its business and results. It was the first company to start with a consistent growth policy. 1995 onwards, it met investors and analysts guiding for yearly growth outlook. Almost no other Indian company had such practices back then.
By 1999, Infosys had reached revenues of $100 million. The same year, it was listed on NASDAQ, the first Indian company to achieve that distinction. Well, not quite. In an article in India Today in March of 1999, Jairam Ramesh then secretary of the Economic Affairs Department and now a senior congress party member, noted that “Technically…Infosys is the second Indian company to list on Nasdaq, since the $30 million (Rs 126 crore) US-registered but wholly Chennai-domiciled Cognizant Technology Solutions listed in June 1998.” Is there a cosmic joke on Infosys to always fall back into second place? I’m kidding. They’re still the pioneers who changed India.
He also praised Infosys for embracing world class standards as a habit. “It is to Infosys' credit that it has been diligently following American accounting principles for the past few years so as to make its debut on NASDAQ easy. The fact that it is a professionally owned, one-industry company of relatively new vintage helped,” he wrote. Share price surged to Rs 8,100 at this time, making it the costliest share in the market. At this juncture, Infosys was among the 20 biggest companies by market capitalization on NASDAQ.
By 2002, revenues went to $500 million. Two years later, $1 billion. Another two years, and revenues touched $2 billion. This was a time of fantastic growth for Infosys. Narayana Murthy, who had helmed the company until 2002, retired in 2006.
It has been 12 years since he stepped down. An entire generation of young Indians knows Infosys’ success as a fait accompli. That may just be the compnay’s biggest contribution. It helped birth a culture of entrepreneurism and inspiring kids to achieve the same success. By 2011, Infy’s revenue grew to $6 billion. In 2012, it started trading on the New York Stock Exchange. In 2016, Infosys’ annual revenue touched $10 billion.
The media is rather tickled by one statistic that has caught everyone’s imagination. Infosys’ revenue last fiscal was nearly 11 billion dollars. Its market cap hovers around 2.8 lakh crore rupees or USD40 billion. One of the few honest-to-god blue chip companies in India, it continues to make heads turn even today. Why? Because Infosys is proof that India works.
The technology giant proved that ordinary people can set up businesses of global standards and scale, and stand toe to toe with the rest of the world. In lazy, laid back Bangalore, of all places, where they relocated in 1983. So that statistic that everyone can’t stop talking about – If you had made an investment of Rs10,000 in 1993 when the Infy IPO happened, it would have fetched you Rs2.55 crore today. That’s some spectacular growth there.
The management has been generous in granting bonus since its listing. It has offered 1:1 bonus shares in 10 out of 11 years when it declared a bonus issue. In 2005, it announced a 3:1 bonus issue. It had split the face value of its shares from Rs 10 to Rs 5 in 1999 (2:1).
The share has been quoting on an ex-split basis since January 24, 2000. “If we take into account the bonus and stock splits, then value of the investment would have grown to Rs 2.1 crore, a compounded annual growth rate of 36.20 percent. Number of shares after adjusting for bonus would have risen from 100 to 17,064,” Ritesh Ashar, Chief Strategy Officer, KIFS Trade Capital, said.
But there are reservations about the company’s future plans and execution. Narayan Bhat, a Bengaluru-based investment consultant, first bought the stock way back in 1996 and continues to hold on to the stock. However, his preference seems to be drifting towards other IT companies.
“Once upon a time, Infosys was the best long term bet for investors, because of its robust management, quality controls, and great quarterly and annual performance. It was the king of the software sector. That is not true anymore,” he said. Bhat added that Tata Consultancy Services is now number one, overtaking Infosys in market capitalisation and investor sentiment. "The Vishal Sikka episode was a big jolt to investor sentiments. Until the company develops a second line of succession, it is not a long term bet."
After being under pressure for an extended period on account of tightening foreign policy, corporate governance as well as a macro factors, Infosys has gained momentum in recent times. Many analysts advise holding on to Infosys for the long term.
The stock is up a little over 20 percent so far in 2018 and nearly 32 percent in the last one year. Infosys reported a strong set of Q4 FY18 numbers and the management guided for a 6-8 percent growth in FY19 revenues, which is in line with industry growth.
“Infosys has the potential to unlock value from digitisation over a period of time. It is advisable to hold on this bellwether to unlock the opportunity that the shifting business provides and continue enjoying the higher payout ratio,” Dinesh Rohira, Founder & CEO, 5nance.com advises investors.
Sanjeev Hota, IT analyst, Sharekhan, says, “Infosys is geared up for building sustainable growth engines through significant investments in digital service capabilities, which provides huge room for growth. We see growth accelerating with improving demand traction from banking and financial services, insurance and healthcare verticals along with recent large deal wins.”