Investors pitch for another Infosys buyback

Investors have urged Infosys to use its cash hoard and go in for a buyback for two more years in order to give value to shareholders.

Last year, Infosys completed a ₹13,000-crore buyback programme, the first in its 36-year history. Around 11.3 crore shares were bought back, and among those who tendered their shares were Sudha Gopalakrishnan, Rohan Murty and some financial institutions such as LIC.

After the completion of the buyback, promoters hold 12.9 per cent in the company, marginally up from earlier.

Growth pangs

But Infosys still has ₹29,000 crore on its books, and it is this that has investors urging the management to consider another buyback, at a time when the company and its peers are finding it difficult to grow.

For example, while announcing the third-quarter results for 2018 fiscal, Infosys said it expects to clock revenue growth of about 5.5-6.5 per cent, down from 6.5-8.5 per cent it had projected at the beginning of the fiscal.

“Infosys should continue to buy back 4 per cent of its equity next fiscal too,” said Madhu Babu, IT analyst, Prabhudas Lilladher.

Others in the industry such as former Infosys CFO V Balakrishnan too feel that with growth rates maturing in the industry, capital allocation becomes key to shareholder value.

“One-off buybacks don’t create shareholder value and it needs to be done consistently,” he said.

To be fair, Infosys has made some changes to its corporate policies, which include giving back up to 70 per cent of its free cash flow back to investors in the form of dividends.

According to company officials, Infosys generates about ₹12,000 crore in free cash flow.

“A share buyback would be a good option to enhance shareholder value and should be used instead of a dividend payout,” said Urmil Shah, IT analyst, IDBI Capital. Other tech outsourcing majors such as Accenture and IBM too are taking the buyback route. For instance, IBM has reduced its outstanding shares by 19 per cent from 2011 to 17 through buybacks. In 2011, IBM had $16.6 billion in cash flows; in 2017, that had come down to $2.5 billion. Accenture has done similarly.

Interestingly, Infosys could follow the trend of cross-town rival, Wipro, which has done two consecutive buybacks (this fiscal and the last one) to reward investors at a time when it faces growth pressures. In the quarter to December 2017, Wipro concluded the second buyback of 343.75 million equity shares. This resulted in a total cash outflow of ₹11,000 crore.

Some analysts believe that things will get clearer for Infosys at the beginning of next fiscal, when the company issues its annual revenue guidance. If earnings in financial year 2018-19 continue to be muted, Infosys will be under pressure to declare a second consecutive buyback, said an analyst from a Mumbai-based brokerage house.

He, however, pointed out out that he expects the growth to improve in the next fiscal.

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