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  • Idhar Udhar - Ajit Dayal

       History repeats: analysts fail!
    April 12, 2001
    Ajit Dayal

    Ajit is the founder of Quantum Advisors Pvt Ltd, an India-focused investment advisory firm that manages money for FIIs and for domestic investors through its 100% subsidiary Quantum Asset Management Company Private Limited and the Quantum Mutual Funds (www.QuantumAMC.com). Ajit is also the co-founder of www.equitymaster.com and www.personalfn.com

    "History created: Infy disappoints" screams the headline at www.equitymaster.com. Similar messages are posted in newspapers, websites, and in the emails coming from the analysts hours after blue-chip Infosys declared results. But did Infosys really disappoint? Or were the analysts on some high-flying steroids and white powder when they had their "expectations" of Infy.

    Lets examine the facts and the expectations based on those facts.

    1. According to numbers from Bloomberg, the mean estimate for Infosys’ earnings per share (eps) for the 12-month period ending March 2001 was Rs 95.7. Infosys reported a number of Rs. 94, a slippage of 1.2% versus the expectation.
    2. It should be noted though, that this expectation or estimate from the analyst community of Rs 95.7 eps for the full year March 2001 was increased from approximately Rs 70 in April 2000. Obviously the analysts recognized that the company was doing better than their estimates and so began to increase their estimates. Better quarterly performance led to an even higher expectation of analysts from the mighty giant, Infosys. You have heard of Microsoft? Good. In that same time period, analysts tracking that stock were bringing down their estimates for the June 2001 eps numbers for Microsoft. Yes, Infosys and Microsoft are different animals but they are in the same breed of companies: software business.
    3. In December 2000 when concerns over the order books of Indian software companies was raised, most analysts said nothing would happen and that the order book was safe. Representatives from the tech industry also kept that mantra. Infosys always maintained that they would grow faster than the industry, but they did not know what the industry would grow at. So, looking out for the year March 2002, the analysts made estimates of an eps number of Rs 152 for Infosys. Using their consensus estimates of Rs 95.7 for March, 2001 as a base, this represented a growth of 59.7% for the year ending March, 2002.

    Now lets see what Infosys has said:

    1. Based on their understanding of the situation in the global markets and in the global technology industry, their revenue growth will be 30% for the year ending March 2002. This will still be better than industry growth rates.
    2. Profit growth will also be 30%
    3. They will hire 1,500 to 2,000 people and continue to build more facilities for those people
    4. Their total capital expenditure will be about Rs 350 crores (US$ 80 m)
    5. Although this is the target for the full year, the first 3 months ending June 30, 2001 will see no growth
    6. They believe in the long-term business potential of the company, its products and services, and its pricing advantages relative to the global majors.

    So, what happened?

    1. The stock collapsed 16%, hitting the circuit on the lower limit
    2. The headlines read, "Infy disappoints"
    3. The analysts will now rework their numbers and show eps estimates for the year ending March 31, 2001 to be closer to the Rs 120 number that the company has indicated. They will write sell notes (where were they 12 months ago?) and fund managers (not known for their creative genius) will follow the analysts and dump their Infosys shares.

    What will happen over the next 12 months?

    1. The management team at Infosys will carry on their job of building one of the leading software companies in the world. And one of the more profitable ones, given their low cost manpower advantage. By the way, this is something that the management has been doing ever since I first met them in 1992, before they were listed.
    2. Analysts will continue to change their business model every day - as frequently as they change their jobs – and be wrong most of the time.
    3. Fund managers will continue to buy and sell depending on whether visa quotas in USA are at capacity or not, or whether the monthly data suggests that flights to USA are empty or full, or some such leading indicators that helps them be as brilliant as they are.

    But maybe what investors should do is to buy the business and you buy the business by buying the stock. There is an important point here that I will repeat. If you wish to trade the Infosys stock, best of luck: log on to your favourite web site or pink and white newspaper and do what you have to do. If you wish to buy the business, think of what Mr. Murthy and his team are doing and see if they have failed. One year ago, my view was that this business is good value at Rs 6,000 and overvalued at above Rs 9,000. Being below Rs 3,300 the stock is nearly 50% below what I was personally willing to buy the business for. Maybe with some near term uncertainty, the value of the business has declined but, as Mr. Murthy said, if Infosys is going to be around in the next century (thank god many of the analysts will not) this one year blip won’t make any difference to the estate of Infosys shares I may leave behind!

    So, if you meet a banker, not willing to get into a scam but willing to lend money to an honest person like me for the fully disclosed reason of buying the business of Infosys, please let me know. Meanwhile, I intend to start small by selling some property that I own and put the sale proceeds into Infosys. In the meantime, every time you read a headline that tells you how Infosys has failed remember: Infy doesn’t fail, analysts do!

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