What made Infy hot stuff on Nasdaq
Infotech Corner
The Basement Tapes - 2
By Adam Peacenik
Last Spring, when the Bangalore-based infotech firm Infosys listed on the Nasdaq, there was little doubt that it would do handsomely well. Wall Street analysts gave it high marks as a forward-looking, professionally run outfit with a strong growth pattern. After all, it was the first Indian company to list on the Nasdaq, a process that requires conforming to the far stricter US accounting standards.
But Infosys had prepared well and its books were clean and impressive. More than 80 per cent of its revenues came from business in the United States. In 1995, even after the firm lost General Electric as its principal client, which accounted for some 25 per cent of its revenues, it still grew smartly.
So when the bell rang at the Nasdaq board last April, there were hosannas aplenty.
Sure enough, INFY (as it is known by the stock ticker symbol) was off the blocks smartly, chalking up 50 per cent gain in no time. It hovered between $ 50 and $ 100 for an ADR till September, doubling the money for many investors (for the uninitiated, an ADR is American Depository Receipts, which are certificates traded like normal shares in dollars, that represent shares of a foreign company held on deposit in a bank in its home country.)
But late in the year, when the US stock market underwent a major correction and recharged its batteries, Infy went fairly ballistic, closing the year on close to $ 330 an ADR.
Now mind you, an ADR is equal to half an Infosys share in India (or one Infy share in India is equal to two ADRs). Which means that the value of Infosys share in Nasdaq was close $ 660. But back in India, an Infy share was only around Rs 6,000 at that time. So what explained the absurd premium - almost five times the share - that people were paying for an ADR in the US?
The question acquired even more urgency last week, when Infy roared up to a mindboggling $ 680 an ADR on Friday. That meant an Infy share (or two ADRs) was worth Rs 60,000 on Friday. The same day, back in India, Infy was trading at a split adjusted Rs 9,000. What explained the huge gulf?
The immediate reason market mavens offered for Infy's ADR ballooning up was rumours of the company acquiring Cambridge Technologies, a Massachusetts software company (although typically the company that is being acquired gets a pop). But that still did not explain Infy's massive rise and the dissonance of its price compared to the value of its Indian shares. Besides, there was also the question of its absurd price to earnings ratio (nearly 1,000) and humongous market capitalisation. At $ 680 per ADR, Infosys' market cap was over $ 40 billion. That was more than the value of Boeing, almost as much as Amazon and Ebay put together, and nearly as much as Yahoo's. Yet Infy's revenues are a modest $ 300 million or so. Even accounting for outstanding growth, it still seemed a little over the top.
According to market pundits, the chasm in valuation arises from the shortage of ADRs. ADRs were essentially introduced to allow American investors to circumvent restrictions on overseas trading, while giving foreign firms access to American equity markets without having to go through the initial public offering (IPO) route. But while Americans are now hungering after foreign ADRs, typically, many semi-open economies (like India's) allow only a small float of shares of domestic companies to be traded as ADRs. The result: too many people chasing too few ADRs, and therefore, galloping prices, especially when a company is seen as promising.
It is instructive to note that amid all the frenzy surrounding Infy, the volume of its shares traded on Nasdaq never crossed 500,000 a day. Contrast that with AOL, Cisco, Dell, Microsoft and the like, all of whom trade more than 15 million shares a day, and you get the picture. It was largely a question of demand and supply.
Sure enough, Infy and its crazed speculators got a minor reality check on Monday, when after the markets opened, the ADR dropped sharply, losing almost 20 per cent during the day to close at $ 543. To many, that is still an inflated value. The cassandras expect a further correction during the week. An overall correction in what many consider is a overheated Nasdaq will also knock Infy back a couple of notches.
But that hardly dilutes the underlying message of the episode. What the heated debate about Infy's valuation has done is to drum up a heraldic mood for other Indian tech and Internet players. This year, several other Indian firms like Rediff and Wipro are expected to list on Nasdaq. Infy has already created the buzz.
In fact, riding on the Infy reputation, the lesser known Satyam Infoway (Sify), which also listed on the Nasdaq late last year, moved up cheekily from its IPO price of less than $ 10 to more than $ 100 on Friday (it too got a reality check on Monday, dropping to a little less than $ 80).
So while the debate still rages on whether President Clinton will go to Bangalore or Hyderabad or both, it looks like Bangalore and Hyderabad have arrived in New York. Bombay and Madras will soon join the league and, who knows, soon it could be Chandigarh and Bhubaneshwar. Already, the Indian stock market is beginning to react sharply every day to the upswing and downturn of Nasdaq. Soon punters in India will be tuning into the Gospel according to Alan Greenspan.
-IndiaInfoCom |
