The year was 1993. The Prime Minister of India was PV Narasimha Rao and the Finance Minister, one Manmohan Singh. The first wave of economic liberalisation had barely gotten going and a young, Bangalore-based company called Infosys Technologies was struggling with its initial public offer (IPO). The issue failed to find enough subscribers and ultimately had to be rescued by its merchant bankers, Enam Financial Consultants and SBI Caps; eventually being subscribed 1.06 times.
In hindsight, it was quite clear why the issue came so close to failure. There were few investors who understood the strange new business of software. Most Indians – definitely most of them in the investing community – had never heard of software; those who had thought that it was something that came free with a computer. Everyone knew that it was something very high tech. The idea that software could be created in India and then sold to customers in the US sounded unlikely.
On top of that was the problem of what this company was worth. You see, we used to instinctively value companies based on their physical assets. The value of a business derived from its land, plant and machinery. This approach even had a sort of an official sanction. Till 1992, a government body called Controller of Capital Issues (CCI) fixed IPO pricing, and the CCI leaned heavily on book value to decide the fair price that investors would pay for a share.
In this sort of an investing culture, here was a company whose plant and machinery was worth very little and depreciated completely in just one year. Moreover, the product was basically just a stream of 1s and 0s – an ephemeral bit of intellectual property. What this company was worth depended entirely on trusting what the promoters said could be done in the future.
It wasn’t a story that too many investors understood. Those were times when the biggest risk in an IPO was that the promoter would vanish with the money. Here was a company where the promoters wouldn’t even leave plant and machinery behind. But somehow, the issue got through, with Enam’s Vallabh Bhansali playing a major role. The rest, as they say, is history. For a huge number of people around the world, India means something very different today. The country of snake charmers with elephants walking down the roads has changed into a country of computer wizards. And it’s history in more ways than one. It’s not just the incredible growth, wealth and employment generated by Infosys and other IT companies that followed it. It’s also set a new standard in corporate governance and ethical behaviour.
However, now, two decades later, the IT industry has reached a new stage. It’s like leaving adolescence and youth behind and reaching a more steady stage of life. The days of heady growth are gone. The tension among investors about what’s happening to the Indian IT industry is palpable. There are almost as many theories as there are analysts. The hypotheses range from there being a problem only with Infosys to a fear that the Indian IT industry collectively going into a general decline.
The truth, I believe, is different and more mundane. The industry has matured. It will grow at a slower pace and will have good years and bad. Instead of being on a two-decade hot streak, even the best companies will make mistakes and stumble sometimes. However, the basics are still very much in place. As long as the manpower cost differential between India and the western countries is maintained, there will be room for businesses to flourish.
As investors, our best bet is to temper our expectations and try and understand the IT services business in some depth, which is what the cover story of the new issue Wealth Insight tries to do. >