Forget about the early-morning explosion on Wall Street -- the real craziness had more to do with Bombay than it did with a bomb.
While most of the U.S. market slid on Friday, shares in India-based
leapt 27%. Creating a huge discrepancy between how the information-technology services company is valued on the Bombay exchange and how it's valued here, the American depositary shares of the company have roughly doubled over seven trading days. Apparently, Americans believe Indians are smart enough to supply IT professionals to the world, but not smart enough to properly value a business in Bangalore.
A rising stock price isn't new to Infosys; the shares, which were issued a year ago at 34, rang in the new year at 330. But even before Friday's leap of 141 9/16 to 670 1/16, this latest run-up apparently stretched the expectations of the company itself. Following Thursday's 82 1/2-point jump, the company issued a statement indicating that it could think of no reason for the recent activity. "There are no new corporate developments outside of the company's normal business activities that may impact trading," said CEO N. R. Narayana Murthy.
But Why? Why?!
As is the case with all Internet companies, talk of Infosys inevitably encounters the V-word -- valuation, that is. And Infosys makes the discussion an interesting one. By several accounts, it's a well-managed, fast-growing company that aims to be a global IT leader, using relatively inexpensive Indian brainpower to meet the needs of clients in the U.S. and elsewhere. Investors appear to be paying a staggering amount to get a piece of Infosys, which offers e-commerce and Internet consulting in its mix of services.
A month ago,
analyst Steven Birer compared Infosys to two different sets of companies -- U.S.-based consulting and systems-integration operations, and development companies in the U.S. and elsewhere. Infosys' growth rate sat pretty much in the center of both sets of companies. But its price-to-earnings ratio was nearly off the charts. The consulting and systems-integration companies averaged out to a 46.2 P/E ratio based on calendar 2000 estimates; the development companies averaged 30.2. Infosys, though, had a P/E ratio of 337. And remember, the stock has doubled since then. (Robertson Stephens was an underwriter of Infosys' ADSs.)
Those Costly Imports
Infosys' valuation gets even weirder when you compare the price of its shares in the U.S. with the price in India. On Friday, the price of an Infosys share on the Bombay exchange was about 9963 rupees. At an exchange rate of 43.6 rupees to the dollar, it turns out to be about $228.50 per Indian share. That makes sense -- until you understand that in the U.S., people are paying $670 for that same share in the form of an ADS. In other words, the same company that the Indian market is valuing at a market cap of $15.1 billion, U.S. investors are valuing at $44.3 billion, confirms Infosys' investor relations chief, P.R. Ganapathy. He declines to comment on the price discrepancy beyond the company statement.
Now, given the stock's pricing, investors might get the bright idea of buying some Infosys shares in India and bringing them to the U.S. market to take advantage of the price difference. No such luck, explains Ganapathy. The ADSs have "one-way fungibility," he says: You can buy ADSs in New York and sell them in Bombay, but you can't buy shares in Bombay and sell them as ADSs in New York. In other words, the only option investors have right now is to buy high, then sell low.
Oh, well. It wouldn't be the first time that Americans have bought imports -- even high-quality ones -- at huge markups.