The pyrotechnics of the Infosys stock (Infy to Nasdaq bulls) should give all investment analysts cause for pause. Quoted at over Rs 5,000 a share, Infosys has a price-earnings (P/E) ratio of over 110-which means that at current level of profitability, the company will take over 110 years to earn back the capital you invest in it. If you are 25, and you invest in Infy at today's prices, it is only your grandson's grandson who will see the company earning back the capital invested in it-assuming you haven't sold the share in the meanwhile.To be sure, this kind of simplication is really an oversimplification. After all, Infosys' profitability can even soar further, given its dynamic management. But those who argue thus should be aware of the possibility that the opposite can also happen: in the fickle world of high-tech, disaster is often just one failure away. Any company can lose its shirt over the next century if it does not continually make the right business decisions year after year. This holds as goodfor Microsoft -- whose market capitalisation exceeds India's GDP -- as for Infosys.
A caveat is in order here: I am not asking anybody to sell Infosys. (I can't, for I have had a dubious 100 per cent record of fallibility: whenever I asked people to sell Infosys for reasons of prudence and profit-booking, the stock actually ended up doubling). The message is something else: while the stock may double or halve based on market perceptions, people who invest in them should know what they are getting into: sheer speculation.
In the early 1990s bull charge, investors who bought Harshad Mehta's "replacement cost" theory piled into ACC stock and took it to the stratosphere; now investors are applying similar theories to "knowledge" and "brand" stocks like Infosys and Hindustan Lever.
It would be foolish to draw absolute parallels between the current trend in infotech stocks with that of ACC in 1992, as the egg on my face attests. But it is still possible to distil some sense out of all this market mayhem.There are my rough conclusions:
Conclusion No 1: Perception is reality. Whenever the world enters a new era of economic transformation and change-which is what the Internet/information age is promising to be-there is a period of "punctuated equilibrium" (a concept I have borrowed from Lester Thurow) when established norms of stock valuation are overturned. In this period, enormous profits can be made by people who are ahead of the curve in terms of their knowledge of what is happening.This applies as much to the people managing Infosys as investors in the stock. And the reason why they make big money is simple: they have the first mover's advantage in terms of public perception, and in the stockmarkets perception is reality-till the basic paradigm changes once again. A corollary lesson: enjoy the Infy bounty while it lasts; but don't wait too long if you see signs of the stock faltering.
Conclusion No 2: One must focus on the "exchange" value of infotech stocks rather than their wealth value.These days, market analysts tend to talk glibly about wealth creation from moving share prices. This is not only facile, but dangerous. Stock prices represent a way of wealth measurement, but do not equal wealth itself unless one realises it.If all the shareholders of Microsoft or Infosys decide to encash it today, they would not be able to realise even a quarter of the wealth represented by stock prices today. So what this means is that if you are a holder of infotech wealth, you must regularly convert it to other forms of wealth by booking profit and reinvesting it to spread the risk.
Even at the managerial level, if I were an Infosys director I would look at the company's valuation as a takeover tool rather than just private wealth. At a market cap of Rs 15,000 - Rs 16,000 crore, Infosys can, with a stock swap offer, take over India's entire steel industry (at current market valuations) or bid for a majority stake in the country's biggest bank (SBI) or private sector company (Reliance). I am notsaying Infosys should do that, but that it should use its valuations for takeovers that will enhance its room manoeuvre further rather than rely on internal value generation alone.
The small guy should stay out. Looking at the vertical takeoff of the infotech sector, one gets the feeling that investors think this is party-time. But knowledge about infotech companies is still in its infancy in India, and there is a lot of untested stock in the market attracting high P/Es. For small investors, therefore, infotech stocks are avoidable for now.Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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