A decade ago, India’s markets were rigorously – most would say stultifyingly – regulated. And, more to the point, they were hermetically sealed from the vagaries of the rest of the world’s money marts. Infosys, founded in Bombay by a small group of entrepreneurially alert young Indians, moved to Bangalore in the south and grew rapidly. In 1993, it went public on the Indian markets and rapidly became one of India’s major stocks. Soon it went global, in March 1999 becoming the first Indian company to issue ADRs in the US and obtain a listing on the Nasdaq Stock Market. Today this software company’s market cap, at $16 bn, could buy a lot of the Bombay Stock Exchange.
US investors who looked closely saw that Infosys was different from the pump and dump high-tech stocks that were sunk rather than floated on the market in 1999. The reason for the ADR was not a need for capital – the company had been growing on revenues generated overwhelmingly outside India for ten years. Instead the motivation came from the type of strategic thinking the company’s IR department continually seeks to communicate. CFO Mohandas Pai explains: ‘The rationale behind the US IPO was manifold. One reason was to get a listing, and to get that, you have to raise money, because Indian government regulations did not allow a secondary listing.
The second was to develop brand equity in the US which, after all, accounts for over 70 percent of our markets. The third was to create a currency for issuing dollar denominated stock options to reward overseas employees, and of course to attract more of them. Finally, the ADR creates a currency for acquisitions.’
The core of the IR operation is Pai, whose assistant in Bangalore, associate vice president V Balakrishnan, has the world outside North America as his beat. North America itself is the province of PR ‘Guns’ Ganapathy, a graduate of the Harvard-affiliated Ahmedabad Business School. He worked for the Tata group before being recruited by Infosys as its head of corporate planning. He came to the US to help with the Nasdaq listing, and while his primary IR responsibility is in the States, he occasionally backs up the IR program in Europe. Ganapathy often finds that the institutions he talks to hold the underlying Infosys stock – bought directly in Bombay – rather than the ADRs but, as he says, ‘My job is telling the story no matter where they hold the stock.’
Looming large
India doesn’t loom large on the horizon for most American investors, so Ganapathy finds he has to do a little bit of handholding. ‘The beauty is that because of our model, we are insulated from Indian events. But we sometimes have to point this out to investors – when a film star gets kidnapped, for example.’
More often, he has to explain the arithmetic – such as why the ADR is trading at a premium to the rupee-denominated stock even after factoring in the ADR ratio and the exchange rate. But mostly he points out the old-fashioned but newly convincing argument that the company is profitable and rapidly growing.
‘One of the challenges has been to get investors out to India to see what we’re doing in creating a cocoon of excellence. Then a lot of the mental block disappears,’ he finds. In doing cross-time zone IR he uses the traditional techniques – ‘e-mails, late nights, early mornings,’ but the shift of Infosys’ operative center of gravity to the US makes his work rather easier. ‘We are very much a virtual company, and the head of worldwide sales and marketing is over here. So on the business side, I might get a better feel than in Bangalore, and sooner, so I often send them feedback,’ he says, with a cooperatively competitive edge typical of the compact but global team.
‘What has driven our IR policy is the value system of the company, the basic philosophy of the founders,’ Pai recounts. ‘Seven well-educated, middle-class professionals came together in 1981 to build a company of professionals, by professionals and for professionals. Transparency, respect for the various stakeholders, a culture of openness and honesty, and doing business legally and ethically, were the core values on which they built the company. So the attitude to investors has always been that we are trustees of their funds and they have an inalienable right to information; the company has to be transparent, and has to adopt the best standards of disclosure in the world.’
That commitment includes immediately placing all investor meetings and analyst calls on the web, allowing anyone to listen in, and webcasting the annual meeting – cutting edge by any standard.
Global action
Infosys derives around 97 percent of its revenues from abroad. But as is often the case for emerging markets, IR outside the country means building brand equity for India. ‘During roadshows and investor meetings, the first thing we do is point out India’s pre-eminent position in our field and show them how, as a global company of Indian nationality, we’re uniquely placed to take advantage of this pre-eminence,’ Pai reports. There is indeed something quintessentially Indian about the company’s principles, which are sincerely expressed, sincerely meant, yet can be justified on pragmatic grounds. The corporate founders tell investors – and anyone else who’ll listen – that the company serves five sets of stakeholders: customers, employees, investors, vendor partners and finally society at large.
Occasionally such seemingly subversive principles meet with polite disbelief from those rare investors who believe in the editorial pages of the Wall Street Journal. But Pai and his California-based deputy Guns Ganapathy say that most see the corporate sense of their approach. As Pai says, ‘If you don’t treat your employees with care, respect them and give them a fair share of the cake, they are not going to stay with you. For a company like ours, employees are our core asset; if we don’t attract employees we can’t grow or run a business.’ Ganapathy agrees that in a knowledge-based industry, this argument tends to win over investors.
Luckily, the fundamentals go from good to better and the bulk of Infosys shareholders are growth and value types who have stuck with the company despite stock market volatility over the last year. ‘Many institutions bought early and have held on. For most mutual funds or institutional funds that invest in India, this is one of the top three stocks. It has the highest rating in the local index, so all of them have exposure to the stock,’ Pai says with some pride. Indeed the Nasdaq-listed ADR represents only about 3 percent of the stock, against 26 percent held directly by foreign institutions and 15 percent by Indian institutions. The founders’ 29 percent and the employees’ 7 percent provide a solid and stable base. Pai sees recent price volatility as being mostly the product of US market gyrations. Before the listing in March 1999, he and his colleagues agonized over whether they were going to expose Indian markets and investors to the volatility of the US market reacting to interest rates, elections and so on – despite their being so far away from the scene of the action. ‘After we listed, we found the impact was very positive because Nasdaq was on the way up; the whole TMT sector in India took an upturn and became the darling of the markets there. However, since the US market has seen increased volatility the other way, we find that impacts on India too, so our investors know they have to look at issues outside India as well.’
To prevent the company being brought down by the demise of dot-coms, its IR team wields fundamentals and its practical business model which, says Pai, ‘is different and much more robust than other software companies. Our global delivery model ensures a substantial part of the work we do is done in India and that we deliver high quality, high value-for-money services to clients.’ Besides, Infosys has low exposure to dot-coms, which account for no more than 11 percent of its business, and that number is declining through a process of derisking which puts caps on various sectors.
‘We have always articulated our business model to investors, and explained why our derisking model is different,’ says Pai. ‘We let them know our value composition and we think most of them know and appreciate it.’
The communications task in India is even smoother. Not only has the valuation soared to reward early purchasers, the company has set new standards for Indian IR which are all the more remarkable for a country that, frankly, did not know what IR was a decade ago. ‘Other large Indian companies are looking very seriously at Infosys as a role model. There’s been an increase in disclosure by them, both in the balance sheet and in other communications to investors. We have worked with regulators in India to improve the norms.’ Pai adds, with a refreshing absence of false modesty: ‘Analysts and investors who deal with us turn to others and say, If Infosys can provide this information, what about you?’
Ganapathy points out that in the US the company is complying with Regulation FD on a voluntary basis ‘since we had pledged that we would honor all the obligations of domestic issuers.’ Also typical of its determination to go the whole nine disclosure yards, the company issues financial statements in Indian and US Gaap, as well as Japanese, German, British, Canadian, French and Australian Gaap.
‘Our investors come from around the world, and we should present them the information in a way that’s familiar to them,’ declares Pai. When asked how expensive such an approach might be, he politely bristles: ‘ If someone says that transparency and a high quality of exposure are expensive, I don’t agree with them. They’re very, very effective, providing good value versus the cost. In that sense, they are not expensive.’ That’s a management attitude that would be very welcome in plenty of IR departments across the US.
