What Should Infy Do to Restore its Honor?

Take a look at the chart below. It shows something very very interesting. This is the stock price chart (adjusted for splits, bonus issues etc) of Infosys, one of India’s most admired companies.

The fellow who bought the stock in March 2000 (the peak of the tech bubble) and held on to the shares in Infosys for more than seven years, essentially did not make any money!

One of the most-admired companies in one of the world’s fastest growing economies – a company which is debt-free, earns super returns on capital, and is run by a management team which is renowned for its operating skills as well as integrity. And the stock earns nothing in the biggest bull market India has ever seen!

What could explain an outcome like that???

Has the company’s earnings declined?

NO! See the chart below:

Infosys’s earnings have grown consistently ever since it went public. Moreover, the earnings growth rate has always been well in excess of India’s GDP growth rate.

Now see the chart below – it shows what really happened to Infy.
As the above chart shows, Infy’s P/E Multiple chart resembles that of a speculative bubble -and indeed it was a speculative bubble.

At the peak of the tech bubble, the investment (speculative?) community was so optimistic about Infy’s prospects, that every rupee of earnings was thought to be worth Rs 350 or so. Today, markets are so pessimistic about Infy that every rupee of its earnings is thought by Mr. Market to be worth no more than Rs 23.

Ben Graham’s “Security Analysis” starts with Horace’s observation: “Many shall be restored that are now fallen and many shall fall that are now in honor.”

What can Infy do to restore its honor, given its current market value, its competitive position, and its financial strength?

What should Infy do?

1 thought on “What Should Infy Do to Restore its Honor?”

  1. Given the situation, Infy could have bought back shares if had excess cash on its balance sheet. In March 2007, they had some 5800 Cr. Cash on the balance sheet and their Capex was average around 1200 Cr. for past 2 years. They could have initiated a buyback.

    It can be argued whether this would have restored the honour because the people who would sell in the buyback would lose out. But it would send the signal to the market that the company is undervalued.

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