Analysis: Infosys may buy back 4-5% of its shares for 105-120 bln rupees

Here is an analytical story I contributed last week to the media organisation I work for currently:

Analysis: Infosys may buy back 4-5% of its shares for 105-120 bln rupees

    Infosys Ltd is seen buying back 4-5% of its equity share capital at an estimated cost of 105-120 bln rupees, as per a few analysts Cogencis spoke with.

    It is expected that the information technology sector major will come out with a buyback issue in the next few months after getting shareholders’ approval to amend its articles of association to allow for a buyback and thereafter getting its board to approve the buyback proposal.

    The company is following the footsteps of its big brother in the IT industry Tata Consultancy Services Ltd. The board of TCS recently approved a proposal to buy back 2.85% of its equity capital for an aggregate amount of 160 bln rupees at 2,850 rupees per share, and also announced that the company's promoter, Tata Sons Ltd, which holds a 73% stake, will participate in the buyback offer.

     The 160 bln rupees TCS plans to use for the buyback amounted to around 40% of its cash and treasury investments aggregate of nearly 390 bln rupees at the end of December.

    But Infosys is not expected to utilised that high a proportion of its cash reserves for its first buyback offer. The company had a cash and treasury investment pile of around 315 bln rupees as of Dec 31.

    "Infosys is likely to take baby steps in its buyback process since unlike in the case of TCS where the promoter may be in need of cash for other uses, the promoters of Infosys don't seem to be in a compelling need to receive large cash payouts. So, Infosys may use a portion of its cash and liquid investments in its books  for buyback, keeping aside the balance for organic or inorganic growth (necessary for reaching the stated revenue milestone of $20 bln by 2020) or return the cash in future in the form of buybacks and/or dividends," said Deepak Jasani, head of retail research at HDFC Securities.

    A recent Sharekhan research report said cash-rich IT companies are declaring share buyback offers to boost the investor sentiment amid ongoing uncertainties. Before TCS, Cognizant and midcap IT companies like Mphasis Ltd, eClerx and Hexaware Technologies Ltd have also announced buybacks, it said.

    But the research note argued that companies such as HCL Technologies Ltd and Tech Mahindra Ltd which are inclined towards inorganic growth options are not expected to come out with buyback offers.

    Infosys is likely to be a middle case where it will use buyback conservatively and keep the doors open for future inorganic acquisitions or organic growth.

    In an investor call held on Feb 14, Infosys CEO, Vishal Sikka said the company was not averse to a share buyback and wanted to use the cash in a way that provided the most advantage to shareholders. He said the company will look at the next 4-5 years of the business and see where capital is going to be needed even as he admitted that the pace of acquisitions in the last two years had not been strong.

    According to HDFC Securities' Jasani Infosys has a higher cash to market capitalisation ratio than TCS and it is likely to buy back about 4-4.5% of its

outstanding shares with a likely cash outgo of 100-120 bln rupees."

    On Mar 1, Infosys had a cash to market capitalisation ratio of 13.4% as compared to 7.9% for TCS.

    Infosys has typically had higher operating cash flow to net profit ratio. In Apr-Dec its operating cash flow contributed 97% to its net profit, according to a recent presentation made by Infosys to investors.

    Operating profit of Infosys in Apr-Dec stood at 139.46 bln rupees, up 12.1% on year, data from Cogencis Corporate Fundamental Database showed. The net profit in the same period logged a 8.7% on-year growth to 107.49 bln rupees.

    Under pressure from investors, Infosys has had to increase its dividend payout twice in the last 3-4 years, first from 30% to 40% and then from 40% to 50%.

    But investors are demanding better shareholder valuations from Infosys and other cash-rich IT companies. In a recent research note, Axis Capital said if Infosys were to hike payout to 100% of its operating cash flow in 2016-17 (Apr-Mar) it would double earnings per share growth rate and expand its return on equity by around 375 bps, which it said could make the market rerate the stock from 14 times price to earnings ratio to 18-20 times.

    For this to happen, the brokerage said, the company will be required to use 106.12 bln rupees cash for share buyback in early 2017-18 (Apr-Mar) extinguishing 4.8% of its share capital and pay dividends worth 35.37 bln rupees.

    According to Axis Capital's estimates, the EPS in 2017-18 (Apr-Mar) will be 72 rupees, up from 63 rupees in 2016-17 (Apr-Mar). The EPS for 2015-16 (Apr-Mar) was 59 rupees.

    It also estimated the return on equity post buyback to increase to 23.7% from 22.5%.  End