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3 Things I Wish I Knew About Infosys Earlier podcast

Apr 26, 2023

The hot topics last week were the Infosys results and the subsequent crash in its stock price.

And while every analyst worth his salt was busy crunching the numbers, I took a different approach. I decided to have a deeper look at the history of the company. In fact, make it much deeper.

So, here's what I did. I picked up the last 20 annual reports of the sector bellwether Infosys and proceeded to give it a thorough read.

Did I succeed in my mission? Do I now have a better grasp of the different qualitative facets of the company than before?

Let us find out in the video.

Hello everyone, Rahul shah here, trying to make investing accessible and profitable for the average investor.

The hot topics last week were the Infosys results and the subsequent crash in its stock price.

And while every analyst worth his salt was busy crunching the numbers, I took a different approach. I decided to have a deeper look at the history of the company. In fact, make it much deeper.

You see, over the course of my career, I have analysed and studied a lot of sectors but never IT.

Let's say my career progressed just fine without having to worry about things like order wins, attrition rates and digital disruption.

But then life is all about expanding your circle of competence, isn't it? And what better way to do it than trying to wrap your head around one of the biggest and the most influential sectors of the Indian economy.

So, here's what I did. I picked up the last 20 annual reports of the sector bellwether Infosys and proceeded to give it a thorough read.

Of course, I didn't intend to read these reports cover-to-cover but only the most important sections that typically occupy the first 25-30 pages of the report. So, in all, I read roughly about 500 pages.

The idea was more about getting a qualitative feel of the company than quantitative.

Let's say my reading was around 85%-90% qualitative and only 10%-15% quantitative.

Did I succeed in my mission? Do I now have a better grasp of the different qualitative facets of the company than before?

Well, I certainly do.

You see, we all know that the company's financial history is impressive to say the least. It has managed to post good numbers on a remarkably consistent basis. Yes, there have been a few blips. But given the dynamic nature of the industry, the company financial performance is certainly praiseworthy.

In fact, anyone who wants to bet on the Indian IT story, would be tempted to take a small exposure in the stock based on its historical performance alone.

However, your conviction goes up several notches once you go through the annual reports of the company and check out its qualitative aspects for yourself. It won't be an understatement to say that beneath the rock-solid financials is a corporate machine that believes in first-rate strategizing and then executing on it ruthlessly.

This is not to say that its strategizing and execution has always been flawless. In fact, far from it. But the way it has recovered from setbacks and reverses, speaks a lot about its resilience and its core strengths.

For e.g. I was impressed with the fact that the company has a repeat business rate of close to 97%. In other words, 97% of the company's revenues come from clients with whom it has done business before. In fact, I have never seen a single year where this ratio has fallen below 90% over the last couple of decades.

In fact, here are the snippets across three different years that corroborates this point.

Isn't this impressive? Imagine the kind of goodwill it has generated among its clients that almost all of them are eager to go back to Infosys to address their IT needs. As a matter of fact, a lot of them are not only willing to engage with Infosys again but also give the company more business.

Also imagine the kind of savings it means for Infosys on the sales and marketing front that it does not have to go around looking for new clients to replace the old ones.

The steady increase in the number of clients over the years is also a good achievement in my view.

In the first ever annual report I read i.e., for the year FY03, the company had a total of 345 clients.

By the time I read the annual report for the year FY22, the number of clients had ballooned to close to 1,800 a significant jump indeed.

And guess what, it had 38 clients from which it generated US$ 100 m revenues each in a single financial year.

Another facet about Infosys that impressed me the most and that came up again and again in almost every annual report, is the lengths it goes to ensure a talented and a committed workforce at its disposal.

Here, I have a confession to make. You see, like most engineers my age, I too had applied for a job in Infosys back in 2000-01. And had Infosys selected me, my career would have taken a totally different turn.

But that was not to be. I was not smart enough to be a Infoscion. In fact, I did not even get a chance to take the recruitment test as my grades didn't make the cut.

However, I do know a batchmate who cleared all the tests and was eventually taken onboard. He was the university topper and very sharp to be honest.

Well, the purpose of this short story is to highlight the kind of talent the company was after back then.

It is said that you are the average of the five people you spend the most time with. And back in the days, Infosys did make sure that this average of the five people you spend the most number of work hours with, was indeed on the very high side.

In fact, in the early annual reports, there are several instances of the company rejecting 99% of the job applications it had received and hiring only the best-of-the-best 1%.

Here's the one from company FY05 annual report where out of the 14 lakh applications it received, only 15,000 eventually ended up joining Infosys.

I am not sure whether the quality of workforce at Infosys today has been diluted a bit due to the sheer number of professionals it has to recruit and because of the competition.

But after going through the company's annual report, there's no doubt in my mind that it still places a huge premium on hiring the best quality workforce.

Take a look at the following quote by none other than one of the company's founders, Narayana Murthy himself, in one of the annual reports.

  • Our core corporate assets walk out every evening. It is our duty to make sure that these assets return the next morning, mentally and physically enthusiastic and energetic.

There are several instances across annual reports of how the company has walked the talk on this.

Be it its world class training center at Mysore, its mandatory training program for each and every employee or its latest Lex learning platform which has a library of over 2,70,000 assets created and curated by subject matter experts, there are examples galore on how it has prioritised continuous learning and reskilling of its large workforce and has kept it up to date with the latest trends in technology.

In fact, if you do a year-by-year analysis of the company's performance, it will be hard to miss the challenges and the mini-crises that it has faced on a regular basis. And this is all but expected in a rapidly changing industry like IT.

However, it is to the credit of its large and talented workforce that it has quickly pivoted its strategy and managed to come out of every crisis stronger and better.

I don't think Infosys' evolution to its present state would have been possible without its laser sharp focus on the constant retraining and reskilling of its large and committed workforce.

Now, as impressive as the company's efforts were towards earning the trust and ensuring the well-being of its clients as well as its employees, its commitment to its shareholders is also praiseworthy in my view.

For as long as I can remember, the company has been hailed as a gold standard for corporate governance and won several accolades on this front, both in India as well as internationally.

As a matter of fact, it was the first Indian company to list on the NASDAQ, and the first to benchmark its organisational practices to global standards.

The way it has changed its dividend payout policy over the years has also been impressive. As it has grown and matured, it has constantly raised its payouts from 20% to 30% to 40% and now 50%.

It is yet another example of its intent to share wealth with shareholders instead of keeping it on the books or frittering it away in the form of unwanted acquisitions and investments.

You see, I am no tech expert and hence cannot comment on where the tech industry is headed in the coming years.

However, the reading of the company's annual reports of the last few years has given me a newfound appreciation of its business model and the strengths it has built over the years.

Of course, the journey has not been smooth. There have been challenges and setbacks on all the fronts, right from missing on growth opportunities to losing talent through high attrition and all the way to rocky leadership changes.

But the fact that it not only survived but emerged stronger from all these reverses, speaks volumes about the systems it has put in place and the competencies it has built over the years.

I think it was Peter Drucker who once said that culture eats strategy for breakfast.

Thus, if the strong culture of dealing with clients, employees and shareholders that Infosys has built over the years is any indication, I won't be surprised to see a stronger and a much bigger Infosys a few years down the line.

As for whether this is the right valuation to enter the stock, the numbers do suggest so. The stock is trading close to its 10-year median PE of 20x, thanks to the 26% correction it has seen from the top recently.

However, my study of the annual reports wasn't done from the perspective of a holding period of 2-3 years.

If a stock ticks most boxes on the qualitative front and the risk-reward also seems favourable from a valuation perspective, then such stocks can certainly be held for the very long term.

However, a periodic check-up, say every one year at least, is essential to ascertain that its long-term advantages are intact and that no complacency or deterioration has begun to set in.

Ensure this and you have may well have a steady compounder on your hands if not one of the best Indian stocks for next 10 years.

Do let me know what you think of my analysis on the stock. Also, please do not forget to like and subscribe if you haven't already.

I will see you in the next video. Good bye and happy investing.

Rahul Shah

Rahul Shah co-head of research at Equitymaster is the editor of (Research Analyst), Editor, Microcap Millionaires, Exponential Profits, Double Income, Midcap Value Alert and Momentum Profits. Rahul has over 20 years of experience in financial markets as an analyst and editor. Rahul first joined Equitymaster as a Research Analyst, fresh out of university in 2003 but left shortly after to pursue his dream job with a Swiss investment bank. However, he quickly became disillusioned working for the 'financial establishment'. He learned first-hand the greedy stereotype of an investment banker is true and became uncomfortable working for a company that put profit above everything else. In 2006, Rahul re-joined Equitymas ter to serve honest, hardworking Indians like his father, who want to take control of their financial future - and not leave it in the hands of greedy money managers. Following the investment principles of Benjamin Graham (the bestselling author of The Intelligent Investor) and Warren Buffet (considered the world's greatest living investor), Rahul has recommended some of the biggest winners in Equitymaster's history.

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