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Should Infy Buy Back Shares?

Infosys ex-biggies Bala and Mohandas Pai have requested it to buy back shares worth Rs. 11,200 cr. at the peak price of Rs. 3850. (Economic Times) (HT @b50)

Would that be a good use of its cash?

Looking purely at cash levels – Infosys has:

  • Rs. 23,000 cr. in cash
  • Rs. 3,000 cr. in liquid funds and CDs
  • Rs. 1,300 cr. in tax free bonds

That’s Rs. 27,300 cr.+ of money that, effectively, lies around doing nothing. For the 57 cr. shares that Infy has, that’s Rs. 478 per share. At the current price of Rs. 3400, that’s about 14% of the share value.

Infy can use that in multiple ways:

  • Acquire someone. They haven’t shown the appetite for large acquisitions. With that cash they could buy many large companies, but they lack the will and the integration will be a nightmare of epic proportions.
  • Pay dividends: But since this is income on which tax has already been paid, a further 15% dividend tax is just tax on tax.
  • Buy back stock: doing a market or tender buyback is another option.

The buyback of 11,200 cr. wouldn’t do much. It would just remove 5% of the outstanding capital of the company, at Rs. 3850 per share. Using 40% of the cash reserve to reduce the outstanding shares by just 5% isn’t a great use of cash. (Though it is better than letting it stay)

They could pay a dividend but that would just make the founders richer. The founders aren’t massive spenders so even that money will just lie around doing nothing.

If Infy needs to grow out of that cuccoon it’s built around itself, getting rid of the cash may help. The cash is a comfort zone, and unless it’s used for a daring purpose it will be useless. While I think the best way for them to use it is to acquire, aggressively and big-ticket, the absence of the gut lining within makes me feel that they should just return it to shareholders.

  • Nikesh says:

    Why doesnt it open a Bank? companies do evolve and change, size, shape and content ! there are many examples across the world. Infy probably can share the DNA of Service Sector i.e., optimising Human capital, additionally it has in-house Operations and Systems expertise (BPO and Finacle). IT services Opex typically 60% wage, Banks are close. Of course, will have to acquire Top-line growing functions (Sales, Treasury, Product develp) or maybe have a joint venture with one of the new banking licencees ….. If you struggling for direction and growth then why not? call it de-aggregation, diversification or the new normal. And dont forget examples at home. WIPRO is a conglomerate, but the IT Services are the only listed entity…. with regards to all,

  • I think we should give time to Vishal Sikka. Considering Vishal being first CEO outside founding members, he may not be carrying the same mindset! Also, coming from products background, thins might change for better for Infy – from strategic perspective!
    I liked Infy’s decision to break out of the mold and get Vishal Sikka on board!
    Let’s see how it works out for this ‘dead cash’ over next 2-4 years!
    Waited so long…. a couple of years more! 🙂

  • Anupam Gupta says:

    Thanks for the mention, Deepak, appreciate it.

  • Ranga says:

    Nice simple points by Deepak. And good comment by Sarang.
    I maybe wrong: I feel Bala & Pai are starting this so hat they can offload a bulk of their shares at a good price?

  • Sanjeev B says:

    I like Nikesh’s suggestion – go InfyBank!

  • Mark Donald says:

    1) I think Capital gain tax will be payable on buyback shares..Infosys being growth stock these gains must be higher for these senior guys who had got them at lower cost. so they dont want to offload their share for sure.
    2) If infosys gives buyback price of 3800 stock will go to 4000 and buyback will fail..If they give buyback price lower than current market price (infy is conservative) stock will tank. It will be unsuccessful
    3) Check what Tata sons is doing milking TCS for other businesses, Infosys should create a Investment company and offer shares to current shareholders

  • Subrata says:

    How about using the cash to buy early stage stakes/incubate startups?
    Infy won’t do a big acquisition (like you said – integration is a nightmare). And that Vishal Sikka will be based in the US opens up opportunities for investing in the Silicon Valley ecosystem

  • Dheeraj says:

    If you ask me, it’s hypocritical for the ex-CFOs to be saying this.
    What were they doing all these years when they had the influence and power to do what they propose now. Infy’s cash balance has been a drag and a problem for ages.
    Also, the fact that both still have considerable ownership of shares, can not be ignored.

  • Rinka Singh says:

    I agree with your point about inorganic growth. Today the IT services sector has become comoditized completely. And INFY clearly represents what IT services is about. They have done organic growth and have now hit the limits, more growth in the same areas is only possible by cutting cost to customer and that would be very difficult to do for them since their systems would assume a certain level of profitability.
    You are also right in that their problem is that they do not know how to acquire or go into products. They have always grown organically – the curse of too much success I guess. I think the reason why they got Vishal Sikka in is to bring some of these skills into the Organization.
    The reason I said buybacks may not be a good idea is because, INFY will now HAVE to go scouting for some big ticket acquistions and they will need a war chest for that. They will also have to burn quite a bit of money pivoting from pure-play services into a services/IP/consultancy kind of model – an IBM kind of model. Finding & negotiating these big ticket acquisitions will take time – perhaps 2 years or more.

  • Rinka Singh says:

    I’m not sure about the InfyBank model. That will require the organization to completely go away from its core competencies. The fact that it has a few components, doesn’t mean that it has enough Organizational wisdom to make a success of it.

    • Nikesh Nandan says:

      I’m not sure about this. E.g., would an IT professional never be able to move away from his ‘core’ skills and retrain him/herself? Or for that matter what is core competancy doing when a computer engineer with 7 years of experience does advertising after an mba. Core competancy helps, but when the going is tough or the desire if different, you have to re-invent. I am not sure it is a much-used term in todays click based world, where we see volatility in every form has increased manifold – businesses dive and product space vanishes within a short span years, (Xerox, Sony, Nokia, Lehman) while others increase valuation 1000% in 2 years (whatsapp, countless others). Murthy/Nilekani himself said (6-7 yrs ago I think) – how do we ensure continuity and quote Collins work – once you make good company great — how do you build it to last. Its not core competancy, it is DNA, culture & replenishing leadership with these very successful elements – much like the effect a successful gene pool has in societal development.