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Infosys to consider buyback

Infosys (Infy) has announced that its board of directors is going to consider a proposal for buyback of shares in its meeting on 13th Oct’22 (link). Previously, Infy announced buybacks of Rs130bn / Rs82.6bn / Rs92bn in 2017 / 2019 / 2021 respectively. The buyback price announced was at 20-25% premium to then prevailing market price

We have estimated a range of potential buyback amounts based on Infy’s cash balance and networth (table 2). Considering the regulation limiting maximum buyback amount at 25% of net worth (Infy’s current net worth is Rs771bn), the maximum buyback amount this time can be Rs185bn. Based on historical buyback sizes as percentage of cash balance (23-32%), the buyback amount can range between Rs83bn to Rs109bn (US$1.01bn-1.33bn).

Infy has a payout policy to return 75% of its FCF (free cashflow) over 5 years (FY20- FY24E) to shareholders. Assuming 75% payout over the cumulative FCF of Rs506bn over FY23E-FY24E, the dividend plus buyback amount is expected to be ~Rs190bn per year. Our estimated buyback amount of Rs83bn-109bn is 43-57% of total payout, in line with historical trends (table 5)

Past two buybacks were done via the open offer route and the one in 2017 was via tender route. We expect the latest buyback to be executed via open offer, wherein the company buys from market on a daily basis over a maximum period of six months. Past two buybacks were completed within 2.5-5 months.

We have analysed price performance of stocks before and after announcement of buybacks. There is no clear relation between price gains and buyback announcement as per data for tier-1 IT companies. For example, in 11 of the past 14 instances, stock prices performed better in one month prior to buyback vs a month following the buyback announcement (tables 3 & 4).

TCS, Infosys and Wipro have consistently announced buybacks with a gap of 1.2-2 years – Wipro’s most recent was in Oct’20 and the company is eligible to announce one in 2022. TCS announced its last buyback in Jan’22 and won’t be eligible for another until Jan’23 (based on the criterion of a minimum one-year gap between successive buybacks). HCLT and TechM have done buybacks less frequently and, going by past trend, are less likely to use this route for payout.

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