Editorial: Buyback is no solution

Aug 07 2014, 01:01 IST
Comments 0
SummaryBetter performance will drive Infy stock, nothing else.

Two ex-CFOs of Infosys, TV Mohandas Pai and V Balakrishnan, along with a former senior vice-president, DN Prahlad, have written to the board of the company suggesting it do a buyback for a sum of R11,200 crore, a large chunk of the firm’s cash and cash equivalents of close to R30,000 crore. The basis for the request is a ‘dramatic valuation disconnect’ between Infosys and its peers which, they believe needs to be corrected. That Balakrishnan didn’t feel the need for a buyback when he was the CFO says something; Pai, of course would argue that Infosys commanded better valuations than rivals like TCS when he was the CFO so there was no need to correct it.

A large part of the reason why the shareholders have charged

Infosys’s board with ‘wealth destruction’ has to do with the fact that rival TCS, the country’s biggest software services exporter, has commanded better valuations than Infosys since mid-FY12 purely because of its superior performance. TCS is growing faster although it is the bigger firm, having become a $10 billion firm in March 2012, when Infosys’ revenues were $7 billion. The difference has been more glaring over the past year with TCS’ profits rising 37% in FY14 while Infosys’s rose just 13%. Not surprisingly, there is a large valuation gap, though it has narrowed over the past few months with investors hopeful that the new CEO will put the company back on track. Also, while it is true that Infosys has underperformed TCS by a wide margin over the past five years, that underperformance has narrowed over the last three years, especially over the last one year.

There is no doubt a buyback will support the share price to some extent; but to what extent is hard to say. At the suggested price of R3,850, a buyback of around 5% is possible. Investors have been cribbing about the cash not being put to use for an acquisition and not earning much of a return either but the prudent thing to do would be to hold on to it. In an increasingly competitive and complex environment, it is hard to gauge when a good acquisition opportunity crops up and

Infosys shouldn’t be caught short of cash. There are those that argue it would still be possible to do a buyout through a share swap and even leverage since the company will continue to throw up around

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...