Aniruddha Dange was in the media glare in 2007 when he—along with Bharat Parajia, H Nemkumar and Vasudev Jagannath—joined India Infoline Ltd (IIFL) from CLSA Asia Pacific Markets. The high remuneration offered to them was much discussed. The hiring was part of IIFL’s plan to boost its institutional broking business and expand across Asia. Dange has since been central to setting up IIFL’s research division and is well known for his understanding of India’s technology sector. Over the last few months, Dange, 45, has moved out of research and has taken up the role of chief strategy officer at IIFL. In a conversation with Forbes India, he talks about the dotcom boom and bust of 2000 and the valuation of current ecommerce companies.
Q. What would you call your seminal work at CLSA?
We were the first to come out with an internet report in 2000, titled ‘The web is cast’. It talked about internet companies. We looked for companies that had an internet strategy. We wrote about Asian Paints and ICICI Bank, companies that understood this space and how they would use the internet to grow. We also did a report about Infosys called ‘To infinity and beyond’ in 1999.
We took a video interview of five Infosys co-founders—NR Narayana Murthy, K Dinesh, SD Shibulal, Nandan Nilekani and S Gopalakrishnan—in Bengaluru. The idea was to communicate with our clients who were not in a position to make a trip to India. We simply sent them a CD.
Interestingly, India itself was not that hot during those years apart from the technology sector. These reports were a big learning from an analyst’s perspective. Those were the days when Satyam and NIIT were an important part of this space. In fact, NIIT was really big at that time. I was guilty of writing reports stating Wipro was inexpensive at a P/E of 170 times in 1999. But you have to understand that these companies had an expected growth rate of around 100 percent and they delivered 150 percent. So the high P/Es were, in fact, reasonable if you look at the P/E growth ratio, which takes into account the value of the stock and the company’s earnings growth.
While we were talking about high P/Es and ‘Buy’ recommendations we were also the first ones to put a ‘Sell’ on Wipro, which was a part of certain indices. It was becoming expensive at a P/E of 370 and when it was removed from some indices, we put a ‘Sell’ on Wipro.
Q. What happened in 2000 when the Indian markets crashed?
The crash was related to the dotcom sector in the US and not the software sector in India. Unlike dotcom companies, Indian software companies were profitable. I remember I had asked a question to Infosys’s Narayana Murthy: ‘When do you think you will report a negative growth year?’ He replied it won’t happen for a decade. This turned out to be true. So we did not have any doubts about the opportunity, but we had doubts about the growth rate for this industry. We knew that it was a tapering growth rate. Every industry goes through a growth maturity phase or even a possible decline. The technology sector was likewise. It was in a high growth state and then the growth moderated and has now entered a matured stage.
Q. Who was more optimistic about the software sector in India? You, as a researcher, or the fund managers?
Clearly, the fund managers were more optimistic. We were at times very sceptical. The bubble burst from a valuation perspective. Nothing was wrong with the sector at a fundamental level, it was just that the growth took a beating compared to expectations. At that point in time, it was difficult to figure out for how long these growth rates would continue. Every year, from 1996 to 2001, the growth forecast was declining. But these companies used to accelerate on growth every year.
You have to understand that the ecommerce and dotcom businesses of the US did not have models. They were based on concepts. A company like Priceline was more valued than all the airlines in the US taken together. In India, there were similar comparisons. The combined market capitalisation of Infosys and Wipro was higher than the combined market capitalisation of the pharma, auto and FMCG sectors in 1999, for example.
Q. You really believed in the ability of Indian software companies?
Even if the tech bubble in the US had not happened, we would have had similar valuations for Indian software companies due to their high growth rate. But let us look beyond the year 2000. There was a big transition that took place. The management quality of Indian software companies is one of the best in the world. So they managed the entire transition from Y2K to ecommerce seamlessly after 2000, which is a big achievement. If the US was not bullish on internet companies then the revenue drop would have been sharper after the Y2K revenues declined. There was a bubble in the ecommerce business in the US, which was good for Indian companies.
Q. How do you look at the present ecommerce boom?
There are areas where bubbles exist today. Some of the valuation that ecommerce companies are commanding may not be appropriate. Money, available to them through PE firms, is not the top concern for an entrepreneur anymore. For them, expansion is also not a big issue. They only want to concentrate on market shares. We see it in the discounts that are being offered by ecommerce websites because PE funds that have invested in these companies want to stay ahead in the race.
Q. But we are not as irrational as we were in 2000...
True. At that time, the irrationality was not for software companies. Only dotcom companies were getting irrational valuations. Today this irrationality is lesser even for dotcom companies. The key factor missing in India then was desktop penetration. That factor is not applicable anymore. Today, mobiles have taken over desktops. Therefore, the numbers that we project are achievable as mobile penetration is going up. Indian mobile penetration is around 900 million, of which only 180 million are smartphones. We believe that a lot will happen through mobile phones. This is the reason IIFL has launched a mobile app that gives complete information and trading functionality to anyone, anywhere.
Q. What are the things that you really look at when evaluating companies?
The most important thing is management. You need to have trust in the management to solve the difficulties the company might face. A good management is able to manoeuvre around any problem. Take, for example, IIFL itself. Before we joined, Nirmal Jain reinvented the business model two times over. It was earlier Probity Research. After that, he launched India Infoline, based on a dotcom model for broking. Then we became an online-cum-offline broker. But when that model was not sustainable we created IIFL Wealth. Now we are an NBFC and give all these services. This is the best example of how a management can change the path based on changing times.
We have to look for agility, at how quickly the management moves. Not getting married to an idea is one of the critical qualities of a successful entrepreneur.
Q. Why did you join IIFL?
All four of us who came here are from middle-class backgrounds. We believed in the India story and we wanted to be part of a bigger financial services story. Then we wondered what should be the next step. Instead of starting a new company on our own we decided to board a running train.
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(This story appears in the 27 November, 2015 issue of Forbes India. To visit our Archives, click here.)