Infosys - A 3000 bagger. How did we miss it?
Over the past 13 years no company has been able to generate the kind of awe and respect that Infosys has. The company has grown 3000 times in terms of market cap. In hind sight we may kick ourselves for not being able to buy this stock but at that point in time Infosys remained a high priced stock and each time some one wanted to take an exposure he thought “ Isn’t everything discounted into the price?” and he stopped himself from buying.
I always cherish the opportunity of going through old financials and annual reports of stocks that have gone up 50 to 100 times. It helps me understand what factors I should have keep in mind while buying and which ones I could ignore for a while. I have included extracts from the Infosys annual report of 1999. Even if we had bought the stock at that time it would have been a ten bagger in 7 years. A CAGR of 37%.
|
How an initial investment of Rs 1 lac in Infosys at its IPO become Rs 32.13 crores. |
|
Figures in (Rs crores) |
February 1993 |
March 1998 |
March 1999 |
August 2006 |
|
Market capitalization
|
Rs 31.84 |
Rs 2963 |
Rs 9672 |
Rs 102,306 |
|
CAGR since IPO |
82.22% |
|
Figures in (Rs crores) |
1999 |
1998 |
|
Total Sales |
Rs 512.7 |
Rs260.03 |
|
Exports |
Rs 500.20 |
Rs 250.93 |
|
Operating profit |
Rs 191.74 |
Rs 88.61 |
|
Profit after Tax |
Rs 132.91 |
Rs 60.36 |
|
|
|
|
|
Figures in (Rs crores) |
1999 |
1998 |
1997 |
|
Sales Growth (%) |
96.83% |
81.05% |
53.95% |
|
Net profit growth (%) |
120.19% |
79.22& |
60.31% |
|
Operating Margin |
37.40% |
34.03% |
34.81% |
|
Operating Profit Growth (%) |
116.39% |
77.02% |
47.43% |
|
RoCE |
63.51%% |
46.09% |
40.16% |
|
RoE |
54.16 |
42.24 |
34.96 |
|
EPS Growth (%) |
120.19% |
79.22& |
60.31% |
|
EPS |
40.19 |
18.25 |
10.18 |
|
Market price |
2924 |
896 |
488 |
|
Growth in market price |
|
|
|
|
Last one year |
226% |
|
|
|
Since the IPO |
302.77 times |
92.06 times |
N.A |
|
PE Ratio |
72.77 |
49.09 |
47.89 |
|
Price to Book |
16.87 |
17.13 |
14.29 |
|
Dividend yield |
0.13% |
|
|
|
PE to EPS Growth (PEG) |
0.61 |
0.62 |
0.79 |
As we read through the above extract of the Infosys annual report in 1999 a few questions arise. These questions which appear quite relevant hide the bigger picture. I have played the “Devil’s Advocate” by putting up these questions (which in hindsight seem foolish) and then tried to answer them without any hindsight bias.
|
The Myth |
The Blaster |
|
It has gone up so much. How much can it go further? If you have the stock book profits when the going is good. |
Stocks that have gone up ten times can rise another thirty times and can rise another ten times.
|
|
Highly priced stocks cannot go up further. In March 1999 Infosys traded at Rs 2924 |
It went up ten times after that. |
|
Never buy high Price to book stocks -The Price to Book is very high in 1999 (16.27 times). |
But it was also high in 1997 (14.29) times) In between the stock went up a six times.
|
|
The mother of it all. At a PE of 72.77 times everything is discounted in the price. The PE has also expanded from 47.89 in 1997. That means that out of the six times the stock went up in two years 1997 – 1999 2 times was due to a PE expansion
|
The PEG was still less then one. In fact the stock had become cheaper with the PEG falling from 0.79 in 1997 to 0.62 in 1999 |
|
Even if the PEG was less then 1 no company can grow at more then 100% so the growth in the PEG is flawed |
Now Infosys was not a value pick it is a growth stock. Even if the growth continues for 2 years a 100 PE company falls down to a PE of 25. |
|
You cannot get an Infosys every time. It is a one off |
Cannot argue on that. |
|
The dividend yield is a meager 0.13%. |
As long as the company’s RoE is more then 20% dividends should not matter. A company with a yield of 4% goes down 25% you still lose 21%. |
There were also a few very interesting things that the normal investor failed to realize
n The RoE was expanding to 54.96% in 1999 from 34.96% in 1997
n The RoCE was also in an expansion mode to 63.51% in 1999 from 40.16% in 1997.
n The operating margins were also expanding from 37.40% in 1999 from 34.81% in 1997
n The high RoCE and RoE was inspte of maintaining a very high amount of money in cash. The return from liquid funds diluted the overall RoCE and RoE from cash invested in operations was significantly higher then what was reported.
The bottom-line is unless an investor could visualize how big software services could have been as an industry he could never have bought and kept an Infosys.
Would love to have the opinion of anybody on the forum who bought and made big money from Infosys. It would be a learning experience for if they could share with us what they thought was the real trigger for holding this Icon of indian technology
Edited by basant - 25/Sep/2006 at 6:35pm
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