On Friday last week, the stock price of Infosys went up by about 17 per cent. This amounted to a market capitalisation of about Rs 20,000 crore. That's probably the largest gain in market value that a single company has ever had on the Indian bourses in a single day. Even in terms of just Infosys' price alone, it's almost equal to the largest percentage gain ever, which was sometime in 1997. And that was the phase when Infosys was about 1/150th of its current size but equity investors were first discovering it.
Why would such a huge company's perceived value undergo such a drastic change within the space of a few hours? If we are to believe the common sense view of how markets value businesses, then the larger a company, the more intensively it is researched, the more transparent its business model, the steadier its market value should be. On each one of these parameters, Infosys must be scoring near the top of its universe. And there's absolutely no shortage of people who let it be known that they have a complete understanding of what this company's business is all about and where it's headed.
There are dozens of research outfits of all kinds that track Infosys as well as the IT services industry closely. If you read any of their reports, they seem to have an utterly perfect understanding of everything that has happened, could possibly happen in the future and always state it with the greatest possible confidence. And yet, suddenly, one day, the market has to revise its estimate of what this business is worth by almost 1/6th.
Why does this happen? If you talk to the market mavens, then they'll give you some sort of a trading explanation like people covering their short positions. But that's not an explanation; it's at best a narration of what happened in different terms. Why were so many people so convinced that Infosys was on a one-way trip downwards? And not a gentle slide downwards, but a fast and fearsome unstoppable plunge to the ignominy of being a has been.
There are two parts to the explanation. One, much of what passes for analysis nowadays is a straight-line extrapolation of recent trends. Infosys has had bad times lately so it must continue to have worse times for the foreseeable future. Moreover, in all these analyses, there is a curious lack of any recognition that company managements are not passively flowing along with events, tossed and turned and thrown around by every trend that comes along. If there's one thing that characterises Indian IT services companies in general and historically, Infosys in particular, it's the ability of their leaderships to exceed expectations. Metaphorically speaking, this industry has a track-record of pulling rabbits out of their hats; a matter of fact, from the perspective of where we started two decades ago, the very existence of this business is a rabbit pulled out of a hat. Just running businesses cleanly and transparently, without hidden agendas and with nothing with the interest of the business at heart itself puts some business (and some promoters) ahead of the general pack. I find that analysts consistently underestimate how much extra value can a quality management bring to the table, despite the fact that whatever value is already on the table is a product of the same quality.
The second reason is that, the whole business of equity analyses has basically become an echo chamber. It's the same set of opinions that keep getting echoed, strengthening each other and becoming so strong that they are extreme versions of some underlying truth. And then something happens and the cycle of opinions reverses itself and becomes extreme in the other direction. The Infosys story is one thing, but the story of how the markets and its opinion leaders react to it is now a separate story. It might be more useful if these leaders focus on this second story.
This column first appeared in The Economic Times on January 14, 2013.