Had you invested in the Infosys IPO in 1993; here is the lesson

29 Aug 2022 , 06:05 AM

Over the last few weeks, there have been a lot of concerns surrounding the IT sector in general and the stock of Infosys in particular. The reason are quite interesting. The stock price has come under stress due to intense margin pressure that the company is under. Over the last 3 quarters, Infosys and most of the other IT companies faced higher employee attrition and lower operating margins. These IT companies were not only hit by higher manpower attrition rates, but also by higher salaries, higher travel costs and substantially higher levels of discretionary spending.

IT companies are applying the brakes on spending

This impelled a number of leading IT companies to start applying the brakes on this operating margin depletion. Infosys cut variable pay to its employees and also held back bonuses. The same was the trend with other leading IT stocks too. Large cap IT stocks and mid-cap IT stocks have all taken a hard beating in the markets. However, the IT industry has now decided to go slow on the rampant recruitment drive and focus more on employee productivity at each level. Even compensation policy will be much more focused and selective, as the IT industry looks to turn the attrition problem on its head.

How investors miss the wood for the trees

The correction in the price of IT stocks has been fairly sharp in 2022. For instance, Infosys has corrected -21.86% from the peak levels of January 2022. The situation is almost the same across large cap IT companies. TCS is down -20.26%, Wipro is down -43.55%, HCL Tech is down -31.29% and Tech Mahindra is down -40.89%. Among mid-caps; Coforge is down -40.35%, Persistent is down -29.28% and LTTS is down -38.29%. All these stocks are down sharply from the peak levels of the year achieved in January 2022.

In the obsession with these short term gyrations in the stock market, we often tend to ignore the larger case for investing in these stocks. While we shall not get into specific stocks, there is an important lesson in looking at how a just an invest and hold strategy in Infosys could have done wonders for you. Let us look back at the Infosys case study.

Just a dumb Buy and Hold on Infosys worked wonders

We often spend a lot of time trying to judge whether the stock has bottomed or topped out. That actually has very limited relevance. You must have heard some heart breaking stories of how investing in the Infosys IPO would have done wonders to your wealth. Here is the story of Infosys in numbers. We have looked at a situation where an investor had bought 100 shares in the Infosys IPO in 1993 and held on to the stock.

Had you invested Rs9,500 in Infosys IPO in 1993 to buy 100 shares at Rs95
Period	Bonus / Split	Adj Factor	No. of Shares	Adjusted Price
Year 1994	Bonus 1:1	2	200	47.500
Year 1997	Bonus 1:1	2	400	23.750
Year 1999	Bonus 1:1	2	800	11.875
Year 2000	Split 10 to 5	2	1,600	5.938
Year 2004	Bonus 3:1	4	6,400	1.484
Year 2006	Bonus 1:1	2	12,800	0.742
Year 2014	Bonus 1:1	2	25,600	0.371
Year 2015	Bonus 1:1	2	51,200	0.186
Year 2018	Bonus 1:1	2	102,400	0.093
	CMP (26-Aug-2022)	1526.80	Current Value	15,63,44,320

Data Source: Infosys Ltd

The results are stunning, to say the least. An investment of Rs9,500 in the Infosys IPO in 1993 would have grown to Rs15.63 crore (yes, you heard it right) in 2022. You actually did nothing except hold on to the stock. In fact, the bonuses and stock splits would have ensured that the 100 shares that you bought in the IPO in 1993, would have grown to 102,400 shares of Infosys today.

What does this mean in percentage terms? That is compounded annual growth rate of (CAGR) of 39.77% returns over the last 29 years. The Sensex has given about 16.5% CAGR returns in the 43 years since its inception, so Infosys has substantially outperformed the index over the long term. Remember, we have not accounted for dividends and you would be earning Rs31 lakhs of dividends each year on an average from your holdings. Let us now look at what investors should learn from the Infosys story.

5 Key takeaways from the Infosys wealth creation story

Here are 5 important things that you can take away from the Infosys wealth creation story, which can serve as an important guide in your investment journey in future.

a)      Start with a holding period of around 5 years. If the stock has done well in this period, it makes sense to hold on to the stock. Rather hold on to a good stock for the long term than trying to hunt for value stocks frequently.

b)      When the stock you hold is doing well, don’t be in a hurry to exit the stock. After all in your entire investment journey, it is a handful of stocks that create the big alpha. Smart investing is all about identifying these stocks and holding on to them. As the legendary Rakesh Jhunjhunwala rightly put it “It does not matter how often your view is correct  and how often it is wrong. What matters is how you hold on to the winners for long and exit the losers quickly”. In the case of Infosys, it was performing and you just had to believe in the story and hold on to the stock.

c)      Focus on the story rather on the noise. IT is a great opportunity and Infosys is a significant player in this space. That is the story. But then, there is noise too. Tech stocks crashed vertically in 2000. Infosys has missed earnings guidance many times in the past. It experienced severe management churn through most of the last decade. It saw its valuation gap with TCS widen over the years before narrowing. Currently, Infosys is facing margin pressures. Despite these factors, Infosys has been a great wealth creator over the long term. Noise does not change the long term narrative.

d)      Look for the potent investor comfort zone. What exactly is that? If there is a company with zero debt or very low debt and consistently holding operating margins above 20%, it is obviously doing more things right than wrong. It does make sense to bet on these companies.

e)      People often ask if bonuses and splits add value. By definition these are value neutral. However, for stocks with consistent growth stories and sound fundamentals, bonuses and splits can be a force multiplier for demand, if not a direct value multiplier.

The story of Infosys is about how a consistent compounder can create substantial wealth over the long term. That is the kind of stories, investor must focus on.