Infys low-risk play means share buyback is best option

BENGALURU: Infosys likely move for a $1.6-billion (Rs 11,200 crore) share buyback in January is part of the companys commitment in April this year to return $2 billion to shareholders from its cash reserves, and reiterates its low-risk approach to acquisitions.

Analysts say another share buyback was “implied” when the company did not specify how it would give back the remaining $1.6 billion to shareholders, after announcing a $400-million dividend in April. They said if the company announces the buyback in January, the process would only be completed in April, the beginning of fiscal year 2020.

“When your growth is 7-8 per cent and you do not want to do big-bang acquisitions, the best way is — if your stock is at a reasonable valuation — you do a buyback. That will keep your return on equity trajectory strong,” said Madhu Babu, an IT analyst at brokerage firm Prabhudas Lilladher. Returning money regularly to shareholders will gradually bring down the equity count, improving the earnings per share (EPS), he added.

In August last year, the IT services firm had announced a $2-billion share buyback, the first in its 36-year history. Stock market regulations say a repeat repurchase can be done only after a year.

TV Mohandas Pai, a former chief financial officer and director at Infosys, said another round of buyback would mean the company belonged to shareholders, and its value would increase with higher EPS.

“Instead of keeping cash in the balance sheet earning 5-6% interest, it is better to give it back,” he said. “Once companies with good cash flows become big, they cannot grow at high rates. If they buy back equity time to time, EPS goes up and the value of the company increases. I think it is good news.”

Infosys declined to comment, citing the “silent period” before the announcement of third-quarter results. However, a person with knowledge of the companys plans independently confirmed the move.

The Bengaluru-based company, which has maintained a large cash flow, has not made large acquisitions where it could have deployed the cash. Cross-town rival Wipro, however, has spent nearly $1 billion to acquire two prominent firms in the recent past to gain new-age capabilities.

Stock repurchase is seen as a taxefficient way to return money to shareholders compared with a large one-time dividend, said HDFC Securities analyst Apurva Prasad. “It is not out of the ordinary and part of the capital allocation policy … It should not be surprising because if you have a large acquisition, you will probably defer doing it by a year or so. In the near term it supports valuation.”

Prasad cited HCL Technologies track record of consistently giving back half its profit, despite making large investments worth $1.8 billion to acquire products and platforms from IBM.

The Times of India first reported on Monday about Infosys plans for a $1.6-billion share buyback.

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