Buyback will hit Infosys’ 2020 revenue plans

KGIRIPRAKASH VENKATESH GANESH Bengaluru | Updated on March 12, 2018


Payout will deplete cash reserves by $2.5 b, reducing ability to make a big acquisition

Given that it is seriously considering a share buyback, IT major Infosys may have to lower its 2020 revenue target, which was expected to be achieved through a combination of organic and inorganic growth.

In case the company exercises the option of a buyback, analysts say that the cash payout will be about $2.5 billion. This will shave off of half of the cash reserves, considerably reducing its chances of a big acquisition that could add incremental revenues at a fast clip by 2020.

CEO Vishal Sikka had set the company a target of achieving $20 billion in revenue by 2020, which he later termed as aspirational. Sources in the company say that revenues close to $20 billion would still be considered laudable.

Two-third of that target of $20 billion by 2020 was expected to come from organic growth and one-third from acquisitions.

Capital allocation strategy

Soon after Sikka assumed office, Infosys had laid out a capital allocation strategy aligned with this 2020 aspiration. It involved a combination of organic and inorganic growth as well as dividend payouts. According to brokerage firm Nirmal Bang, a material change in the capital allocation policy is unlikely to happen as long as the tall 2020 goals remain. The board and the management would prefer holding on to capital to drive growth.

The company has increased the dividend payout ratio twice, to 50 per cent (from 40 per cent, and 30 per cent earlier). Inorganic activity resulted in the acquisitions of Panaya, Skava and Noah Consulting.

Battling Cognizant

Prabal Basu Roy, a Sloan Fellow at the London Business School, and PE investor, told BusinessLine that by 2020, Cognizant will probably end up with $18.5 billion in revenue, while Infosys will get to $13-$14 billion without acquisitions.

If Infosys is keen on narrowing the gap, then it will have to go in for acquisitions. A buyback will only reduce the chances of an acquisition. “Therefore in that context, $20 billion becomes important. But if it is not that important for the company, then Infosys will always stay behind Cognizant,” he said.

The other issue is about the acquisition itself, as any Nasdaq-listed entity now comes at a valuation that is about five times of its sales. So, Infosys will have to find additional cash to acquire a company to push revenues higher. “So, what is important to know is whether Infosys has an acquisition plan in place,” he said.

And tied to the 2020 timeline is Sikka’s pay, including the variable component of his salary.

Kris Lakshmikanth, CEO of executive search firm Headhunters India, said that it will be interesting to see how Sikka’s compensation pans out once the buyback plan is rolled out.

Published on March 01, 2017

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