The Infosys stock rose by 4.54% on Thursday ending the session at Rs 1021.15 after the IT major said on Wednesday its board would meet on Saturday to consider a proposal to buy back its shares. It’s raining buybacks in 2017 with companies having bought back nearly Rs 30,000 crore worth of shares so far. Equities have hit new highs; the benchmark Sensex has put on a smart 19.41% between January and now. At the current levels of 31,795.46, the gauge trades at a price-earnings multiple of over 18.81 times one-year estimated forward earnings. This is a big premium to the historical multiples. Much of the rally, market watchers say, has been driven by liquidity.
If Infosys’s board decides to go ahead with the buyback, the Bengaluru headquartered company will join the ranks of other IT majors like TCS, Wipro, HCL, Mphasis, and Mindtree all of whom have done share repurchases in 2017.
Infosys had announced in April that it will pay Rs 13,000 crore during the current financial year to its shareholders as dividend and/or buyback.
Analysts at Edelweiss said in a note the buyback will lead to a higher return on equity (RoE) and also payout ratio. They observed the move is not an outcome of lower growth, instead, it means limited possibilities of large acquisitions going ahead and consistent generation of cash. Further, the note said, with domestic IT companies shifting focus to small skill-based rather than large acquisitions, the need to maintain huge cash pile is waning. “This implies higher distribution, either in the form of buybacks or increase in dividend payout. Reduction in cash will lead to higher RoCE, which will entail sector rerating,” the note said.
“Moreover, Infosys’ guidance of 6.5-8.5% in spite of multiple headwinds like technology transition (weakness in legacy business), project cancellations and automaton-led realisation dips highlights the company’s strong fundamentals and client relationships,” the note added.