By Pravin Palande

Skeptics have always wondered whether at the current market price of Rs 9,962.95 (face value: Rs 5) the Infosys stock has been over valued by the market. By all conventional measures, the stock quote appears very unrealistic.

That is the reason why we are making here an attempt to look at Infosys in a very unconventional manner. If one looks at the company which is growing at a 100 per cent rate and with its current price-earnings multiple at 500, one wonders whether there is any steam left in the stock. Instead of looking at the stock quote as overvalued, an attempt is being made now to normalise the whole argument.

Here it must be noted that Infosys has valued its intellectual assets at Rs 2,672.6 crore. The company has clearly mentioned in its balance sheet that the information on intellectual assets is only for additional information to its shareholders.

In the additional information section, the price-to-book value ratio suddenly takes a new form. Normally, the price-to-book value appears to be much higher at around 115 times. But if one normalises this and adjusts with the intellectual assets, the price-to-book value works out to 20.29 times. In terms of intelligence, the price-to-intellectual assets works out to 24.65 times. One reason for the high price is that the company is expected to grow at a very high rate since analysts feel that due to the Y2K fears, the results for the last quarter were only up by 95 per cent.

At that point of time, the scrip was rammed as the company did not perform up to market expectations. Now, there are a few fund managers who believe that through January to March, with the Y2K bug fears getting over, the performance of the company will be above market expectations. If this does not happen, one can expect the company to get a nice pull as far as its market price is concerned.

But instead of looking at the company over a quarterly horizon, let us look at the company over a longer period of time. Over a decade, the company has created intellectual assets, which works out to 465 per cent of its actual capital employed. If we exclude the human resources, the brand value of the company as a percentage of the capital employed works out to 300 per cent.

Excerpts from the Infosys balance sheet:
It is becoming increasingly clear that intangible assets have a significant role in defining the growth of a hi-tech company. So quite often the search for the added value invariably leads us back to understanding, evaluating and enhancing the intangible assets of the business.

From time to time, Infosys has used various models for evaluating assets off the balance sheet to bring certain advances in financial reporting from the realm of research to the notice of shareholders. Such an exercise also helps the Infosys management in understanding the components that make up good will. The aim of such modeling is to lead the debate on the balance sheet of the next millennium.