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Infosys needs to spell out its strategy: Analysts
The suggested buyback price of Rs 3,850, which also is the stock's 52-week high, is at 6.7 per cent premium to the Wednesday's intra-day high price
Infosys extended its 5 per cent rally in the past two sessions on the National Stock Exchange and surged over 2 per cent in intra-day deals to Rs 3,608 to hit a five-month high on Wednesday.
The up move comes on the back of the company’s former chief financial officers -- T V Mohandas Pai and V Balakrishnan and former senior vice-president D N Prahlad -- writing to the company’s board to “immediately” consider a Rs 11,200 crore (approx $2 billion) buyback of shares.
The suggested buyback price of Rs 3,850, which also is the stock’s 52-week high, is at 6.7 per cent premium to the Wednesday’s intra-day high price and nearly 10 per cent higher than Tuesday’s closing price.
If implemented, the buyback will be a first at Infosys since its listing on the stock exchanges in 1993. As of June 30 2014, the IT major had around Rs 30,000 crore (Rs 300 billion) in cash and equivalents.
Says Saurabh Mukherjea, CEO - Institutional Equities, Ambit Capital: “The company has surplus cash and a lot of market participants, including us, over the last three–four years have maintained that if Infosys wants to see its stock price go up, it needs to return some of this cash to the shareholders and buyback is one of the most efficient ways of returning money to shareholders.”
“My understanding is that several institutional investors have written to the company in the past requesting for a buyback.
"However, the management has not been yielding thus far in its desire to offer a buyback.
"Our hope is that the new CEO will take a more liberal and progressive view of its capital structure and realise that it is holding ample cash,” he adds.
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Infosys needs to spell out its strategy: Analysts
Cash is king
Infosys, however, feels that the high level of cash is an important tool in the hand of the company to weather bad times.
In his interaction with the media soon after taking charge as Infosys CEO earlier this month, Vishal Sikka had said cash was something very important for the company to overcome bad times.
“We have a wide range of options open to us. I think the focus on margins and having enough cash available to weather storms is a very important criterion. There are many dimensions that we will consider over time but I definitely do not rule out acquisitions,” he said.
Ajay Bodke, head of investment strategy and advisory, Prabhudas Lilladher also tends to weigh in favour of the former Infosicians that the company ought to spell out if an acquisition is on the anvil or opt for a buyback.
“One needs to understand where this demand for buyback is coming from.
"Infosys has a substantial amount of cash in its balance sheet, which is earning sub-par returns.
"If a large value additive acquisition is not on the anvil, it makes sense for Infosys to return the cash either by way of a buyback or one–time dividend,” he says.
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Infosys needs to spell out its strategy: Analysts
The road ahead
While experts do suggest that clarity on what the company intends to do with the cash pile it has generated over the years will be a positive, they do not expect the company to announce a buyback or a one-time dividend immediately, especially at a time when Infosys has seen a lot of churn in management.
“We need to give the new CEO a reasonable time -- say a quarter or so -- to spell out his strategy.
"The issue, I feel, has got complicated due to a change in management.
"We are bullish on the stock and think that it can appreciate to Rs 4,040 in the next 12–15 months.
"We expect a revenue growth of 7.4 per cent in FY15, 12.7 per cent in FY16; earnings growth of 14.8 per cent in FY15 and 11.4 per cent in FY16.
We are projecting RoE (return on equity) of 22.4 per cent in FY15 and 24.4 per cent in FY16 and Return of Capital Employed (RoCE) of 23.5 per cent in FY15. The stock is trading at 14.7x FY16 earnings, which in our opinion is quite attractive,” says Bodke.
Pratik Gandhi, an analyst with IDBI Capital also feels that it is too early to expect a buyback, one-time dividend or acquisition from Vishal Sikka, who has just assumed office from August 01.
“It will take some more time before the company goes in for an acquisition, if required. Our pecking order in the large-cap information technology (IT) space remains HCL Technologies, TCS and Tech Mahindra, followed by Wipro and Infosys."
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Infosys needs to spell out its strategy: Analysts
The stock, however, has been trending up since the past few sessions in the anticipation of a buyback.
But, if that didn’t happen, analysts expect the stock to correct from the current levels.
Gandhi says his one-year target for Infosys is Rs 3,440. And though it has crossed this level, he still maintains a hold rating on the counter.
“One also needs to keep a tab on the rupee-dollar equation going ahead that has the potential to positively impact the earnings,” he adds.
But even as the analyst community support the buyback demand, the timing of the letter by former employees does raise questions of pressure tactics by old executives on the new management.
No such letter was written at the time when Narayana Murthy re-joined the management for his second stint but within days of a new CEO taking charge, old executives want investors to be compensated at the all time high price the company has ever touched.
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).
