Journey of the company from an underperformed IPO to investors’ sweetheart
Had you invested ₹10,000 in Infosys IPO (~100 shares), the investment at the moment would have grown to over ₹7 Crore.
Takeaways from this blog:
You will learn about bonus shares.
You will learn about the corporate events of one of the most reputed company of the Indian economy.
As much as the statement looks very alluring, the process of how it was made possible is even more interesting and can clear our understanding of how bonus shares can make wonder.
A gift to investors which results in increase of number of shares without affecting the total evaluation of the portfolio.
Let’s break it down further:
“which results in increase of number of shares” is self-explanatory. We now know that our shares will increase in number once the bonus is issued.
Bonus share is denoted in x:y format. Which means “x” number of extra share for every “y” shares.
1:1 bonus means you will get one extra share for each share you hold. In other words, your number of shares will get doubled.
“without affecting the total evaluation of the portfolio” This one is tricky. Now that our shares are doubled, does that mean our evaluation is doubled as well? No! The price of share gets adjusted accordingly.
So if I had 100 shares of ₹100 the total evaluation would be ₹10,000
Now if I get 1:1 bonus, my total shares would be 200 but the share price will get adjusted at the half price as well, which would be ₹50, making no difference in the evaluation.
But then, what’s the meaning of that thing? How is that helpful anyway? Well, you have come to the right place for that question. Now that you know the definition of bonus share, you are ready to know the wonder it can make.
For the sake of this blog, just assume that split is also same as bonus share. It is a big topic which needs understanding of face value and dividends. Finding the resultant number of share after split is easy. If the split is 10 to 5 that means the face value is halved, which will result in doubling of the shares.
Basically number of times your shares will be multiplied is Before Face Value divided by After Face Value [ Told ya! It’s bit complicated ]
Historical Background & Timeline
On this 14th July, Infy finished 27 years of getting listed on Indian stock exchanges. Let’s have a brief history and series of facts before we look at the corporate events which yielded the total return of over 6000%
In 1981 Mr. Narayana Murthy borrowed ₹10,000 from his wife Mrs. Sudha Murthy to start Infosys.
In 1983 the HQ was shifted to Bangalore from Pune. Even though it started in 1981, the first computer of the company was purchased not any sooner than 1983
(Model: Data General 32-bit MV8000)
In 1989, the joint venture with Kurt Salmon Associates collapsed and the journey so far became mobius, they arrived at the same post they had started. And moreover Mr. Ashok Arora, one of the co-founder, left the company
After many ups and down, in 1992 company became private and on 14th July, of 1993 Infosys Limited was listed on stock market in India. Not only that but in 1999, it became the first Indian company to get listed on NASDAQ as well.
Coming back to the listing on Indian markets, the IPO did not perform well. It was not subscribed enough to go through. At that time, Morgan Stanley bailed it out by purchasing 13% stake in the IPO & the rest is the historical performance of a company started by 7 ordinary and broke engineers who had a great vision to get it done.
Surprisingly when the company was listed (after the IPO) the stock made it’s debut with 60% premium.
“Shivam, that’s cool! But where is the money part?” you may ask. Let’s assume that you’d applied for an IPO. As it was undersubscribed, you would have surely got that. So the initial investment would be ₹9500 (inflated price would be equivalent to ~₹55,000 as per 2020)
The company was started with US$ 250 and have reached to US$ 35 billion. The below chart represent the journey as the investor’s point of view of how the company’s growth helped the investors achieve significant wealth.
The final evaluation is based on the last traded price and can have marginal error (May be it can be ₹7.1 or ₹7.3)
And the dividend is not included in the final evaluation. I just multiplied total shares with last traded price. Which leads us to the next topic…
Dividend | The Real Boss
Apart from the big fat returns, this is the most useful perk of bonus according to me. If you are thinking of cashing out those ₹7 crores, I would highly recommend not to do so. These many shares is a real cash cow.
Dividend is the part of profit, which companies make over the time, which is paid to investors. Many companies pay it, many don’t. It is another topic which I would cover in another blog. But right now you got the idea! It is usually paid per share. So if I have 100 shares and ₹1 of dividend is declared, that means I will get ₹100 as a dividend income.
Now co-relate that with our scenario. You have over 100,000 shares. The last dividend declared by Infosys is ₹9.5! That means you would have got ₹950,000 while others are struggling to earn during COVID-19 situation! Observe the butterfly effect of ₹9500 invested years ago. And that dividend was quarterly. For example, total dividend of 2019 was ₹22.5, that means in 2019 your dividend income could have been ₹22,50,000. Many people work years to reach that salary level.
There are many use cases like this. Wipro is even better and unbelievable at the same time. It grew ₹10,000 to ₹700 Crore!!! 100x time of what we just saw. I chose to write about Infosys because it has not exhausted the face value yet. Face value of Wipro was reduced to 100 to 2 in two split sessions in 1990 and 1999 with split of 100 to 10 and 10 to 2 respectively. Which means the number of shares got the boost of 50x. Infosys has been split only once in 1999 with the split of 10 to 5. Now if Infosys split the share any further, let’s say 5 to 1, the share would be 5 times of what you have now.
I hope you learned about the importance of long term investment and its other aspects. If you have any questions or have some corrections for the information I have given, please do comment and let me know.
I do not endorse anyone to make any investments in any companies, this blog is based on the historical data.
As Warren Buffett once said “Never put all your eggs in one basket”.
Invest smartly but do start investing.
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