Infosys buyback gets support as investors question cash reserves

Infosys continued to gain ground on Wednesday, surging about two per cent in intra-day trade to Rs 3,608, a five-month high.

The rise follows former chief financial officers (CFOs) T V Mohandas Pai and V Balakrishnan, along with former senior vice-president D N Prahlad, writing to the company’s board to “immediately” consider a Rs 11,200-crore (Rs 112 billion) buyback of shares.  

The suggested buyback price of Rs 3,850, a 52-week high, is at a 6.7 per cent premium to Wednesday’s intra-day high and about 10 per cent higher than Tuesday’s closing price.

If implemented, the buyback will be a first at Infosys since the company was listed in 1993.

As of June 30, Infosys had about Rs 30,000 crore (Rs 300 billion) in cash and equivalents.  

Saurabh Mukherjea, chief executive (institutional equities), Ambit Capital, says, “The company has surplus cash and a lot of market participants, including us, through the last three-four years have maintained if Infosys wants to see its stock price go up, it needs to return some of this cash to shareholders, and buyback is one of the most efficient ways of this."

"My understanding is several institutional investors have written to the company in the past, requesting for a buyback. However, so far, the management has not been yielding in its desire to offer a buyback. Our hope is the new CEO will take a more liberal and progressive view of its capital structure and realise it is holding ample cash.”  

Infosys, however, feels the high level of cash is an important tool to weather tough times.

In his interaction with the media soon after taking charge as chief executive earlier this month, Vishal Sikka had reiterated this.  

While experts suggest clarity on what the company intends to do with the cash pile generated through the years will be a positive, they don’t expect the company to announce a buyback or a one-time dividend immediately.

“I lean in favour of former Infosicians. Though the company ought to spell out whether an acquisition is on the anvil or whether it will opt for a buyback, we need to give the new CEO reasonable time, say, a quarter or so to spell out his strategy.

The issue, I feel, has become complicated due to a change in management. We are bullish on the stock and think it could appreciate to Rs 4,040 in 12-15 months.

It is trading at 14.7 times the FY16 earnings which, in our opinion, is quite attractive,” says Ajay Bodke, head of investment strategy and advisory, Prabhudas Lilladher.  

Through the past few sessions, the stock has been gaining in anticipation of a buyback.

However, if there is no buyback, it could correct from current levels, analysts say.  

“Questions have always been raised on how Infosys will utilise its cash pile. Even in core fundamentals, it has been lagging TCS (Tata Consultancy Services) and HCL Technologies. The stock could correct in case a buyback or an acquisition doesn’t come through, as some investors would have bought anticipating this. However, we remain bullish on Infosys, at it is available at reasonable valuations,” says Mayuresh Joshi, vice-president (institutional), Angel Broking.  

Even as the analysts support demands for a buyback, many in the market are wondering on the timing of the letter.

Interestingly, neither Pai nor Balakrishnan had favoured shareholders’ demands for share buybacks during their respective stints as CFO.  

The last has definitely not been said on this issue, with Infosys sitting on an eye-popping cash pile of Rs 30,000 crore (Rs 300 billion).