Infosys: Buyback possible every two years, say analysts

At a time when returns from software stocks have been low, Infosys should look at buyback every two years to stimulate its earnings per share growth, say analysts. 

The country’s second largest information technology (IT) firm is sitting on a large cash pile, with reserves of Rs 35,985 crore or $5.4 billion as on December 31. 

“They should use the entire free cash flow generated per year through either dividend (payment) or a tender offer buyback every two years. It should help the company reduce the number of shares and improve earnings per share. Currently, it has a 40-50 per cent dividend pay-out ratio on the profits earned but is still not allocating the cash on books,” said Madhu Babu, an IT analyst at Prabhudas Lilladher. 

In February, Infosys sought shareholders’ approval to amend its articles of association to include share buyback under the Companies Act. 

The Bengaluru-based technology services firm has so far been conservative in using cash, in keeping with the policy set by its founder N R Narayana Murthy. While Chief Executive Vishal Sikka has said it could generate incremental revenue of $1.5 billion through acquisitions to achieve the target of $20 billion by 2020, so far it has not made a big bet to buy companies. 

Read our full coverage on how IT firms have used their cash pile

Since he took over as CEO in August 2014, Infosys has spent $540 million to acquire four companies but these were to acquire capabilities in automation and digital.

The company has drawn flak from some key shareholders for not using the excess cash in its books after peer Cognizant approved a proposal from institutional investor Elliott Capital and announced it would return $3.4 billion to shareholders through buyback and dividend. 

Infosys’ stock price return has eroded significantly in six-seven years. While the stock price (adjusted for bonus, stock split) was hovering near Rs 850 at the start of 2011, it closed at Rs 1,020 on Friday, a mere 20 per cent return in six years.
 

Though the company has not considered a buyback or big size acquisition, relative to its cash pile, another analyst says, it has rationalised the capital allocation by increasing the dividend pay-out ratio from 25 per cent in FY13 to over 40 per cent in FY15 and FY16. This is the highest among the top three India-listed players — Tata Consultancy Services, Infosys and Wipro. “Since Sikka has come, the dividend pay-out has been rationalised, though it has not been very aggressive in mergers and acquisitions (M&A),” says an analyst, who did not want to be named.  

 

Between FY10 and FY13, the dividend pay-out ratio was 20 to 30 per cent (barring FY11) and the cash kitty was growing in double-digits (14-26 per cent); the kitty has grown between four and eight per cent after Sikka joined. Some believe the company has not been completely “inactive” in acquisition, as it acquired small firms, especially to add capabilities. Panaya and Skava were acquisitions in the niche technology segment to improve the company’s automation strengths.

 

Nevertheless, Infosys’ return ratios like return on equity continue to inch lower. That’s largely because the operating earnings margin has been consistently dropping — from almost 39 per cent in FY10 to 32.3 per cent in FY16, unlike the 30-32 per cent margin range TCS has maintained in this period.

Apart from ways to boost shareholder returns, Infosys needs to improve growth rates in the business, too.