INFOSYS - TO BUYBACK OR NOT IS THE BIG QUESTION
By Ruma Dubey
The big debate raging in corporate and analyst circles – should Infosys buy back its shares? is that a good idea? Can that be termed as a ‘confidence’ building exercise?
Three ex-employees of Infosys, Mohandas Pai, V Balakrishnan and DN Prahalad have written a letter to Infosys, asking it to buy back it shares, which Balakrishnan says will go a long way in bolstering confidence in the new CEO, Vishal Sikka. Balakrishnan was the CFO of the company and he resigned in December 2013 – what prevented him from initiating a buy back when he held office? Why the need to now “provide a voice to the thousands of shareholders of the company, who overwhelmingly support a large cash return”? This sounded presumptuous, almost like Arnab Goswami, saying “over one billion Indians demand an answer!”
But politics apart, we need to look at the merit of this idea. As at end of 30th June 2014, Infosys was sitting on a cash balance of Rs.29,748 crore. Its last acquisition was in 2012 of Swiss company, Lodestone, paying Rs.2000 crore. After that there is not even a talk of the company scouting around, given its own internal management churn. Thus sitting on idle cash, that too so much cash, does not make any sense. So why not a buyback with some of that money? Many are asking, why not a bonus or a big dividend? Yes, these two would go on to reward the shareholders but not the company directly.
There are distinct advantages to a buy back. When we are talking about a buy back, we are talking about a company buying back its outstanding shares, which are shares in the public domain, outside its control. Either by buying it back itself from the open market or by putting up an offer to existing stock holders at a fixed price. Shareholders benefit even if they do not sell – because it reduces the number of shares even though there is no change in earnings; this means a higher EPS. This is the opposite of bonus – we do get more shares but the capital goes up and EPS goes down. Another added advantage – by using the cash, it means assets go down which in turn means the Return on Assets ratio actually improves and Return on Equity also goes up as number of outstanding shares reduces. Thus financially, there are most certainly many advantages.
At the same time, for a company like Infosys, which has huge employee stock options, buying back shares would mean there would be reduced risk of dilution while increasing shareholder value.
Buy back also helps improve a stock price. When the stock price is deeply discounted, when price is pummeled due to weaker earnings, when management invests its cash in buying back shares, the message sent across is – the market is being unfair in discounting the share price and it is there to shore up. This is probably what Balakrishnan meant when he said, “it will go a long way in bolstering confidence”.
Yes, it is also the best means to keep off predators – take a look at the current shareholding pattern of Infosys. Promoter stake is just 15.94% and the Narayana Murthy family holds a miniscule 4.47%. FIIs are the one who rule the roost – they hold 41.58% stake and DIIs hold 14.08%. Thus if we look at buy back as a means to increase promoter holding to retain control, it would be a good move. But then again, with most of the promoters today having left the company, the question being asked is – do they WANT to retain control?
Even if we look at things from the FIIs point of view, buy back makes sense. Apple in USA, spurred by its huge pile of cash and a near zero percentage interest rate, is giving its shareholders the highest returns ever. Its stock price is up 25% ever since it spent $18 billion on its own shares between January and March. As per data compiled by Bloomberg and Standard & Poor’s, this is the highest four-month returns among the 20 biggest quarterly repurchases by any company since 1998. On the other hand, IBM was on a share buy back spree, not with the objective of shoring up its holding but to boost its EPS. Our very own conglomerate, Reliance Industries in Feb’12 had bought back 46.24 million shares of Rs 3,366 crore from public shareholders. In fact it also declared a bonus. Currently, it is sitting on cash to the tune of Rs.81,559 crore and there is news doing the rounds of another buyback.
Well, buyback is a good idea for Infosys and its shareholders – only question – as stated earlier, who are the promoters of Infosys who want to hike their stake? Maybe a bonus with a buyback would be a much better idea, what say?