Infosys, the country's second-largest IT services company, recently announced a share buyback deal while sharing its numbers for the fourth quarter. Gaurav Garg, Head Research, CapitalVia Global Research Limited, says this the third time that the company has gone for a buyback.
In an interview to Moneycontrol’s Kshitij Anand, Garg talks about what the latest move means for the Bengaluru-based IT player. Edited excerpts:
How many buyback has Infosys approved in recent years?
This is the third time Infosys has announced its buyback deal. In December 2017, Infosys initiated its first Rs 13,000-crore buyback, which included 11.3 crore equity shares at a price of Rs 1,150 per share.
In August 2019 it bought back 11.05 crore shares as part of a Rs 8,260-crore buyback deal at an average price of Rs 747.38 a share and this is the third buyback offer that Infosys has announced in 2021.The BSE data shows that 23 companies have initiated buyback via open market. Why are more companies taking the buyback route—tax issues, fall in price or something else?
A buyback usually demonstrates promoters’ confidence in the company's future. The reasons for the buyback include to reward investors, financial ratios will be improved, promoter holdings will be increased, the public float will be reduced and volatility of share price will be reduced.
In addition to the above reasons, if the company's stock is trading at a discount price due to a systemic risk such as COVID-19, the company can use this as an opportunity to repurchase shares at a lower price.
This may be the major reason for the companies' buyback in the recent past. From a capital allocation perspective, companies (especially from the IT sector) have a lot of cash with them and out of all the available options— dividend payout, reinvestment, inorganic expansion, buyback, etc—of deployment, buyback seems to be one of the better options.Why do companies do buyback via the Open market?
A company can buy back shares in one of two ways. One is a tender offer, in which the company offers a direct offer to customers to purchase a certain number of shares at a fixed price.
The second choice is to purchase in the open market. The company agrees to buy a certain number of shares in the open market. It sets a price limit and can buy at any price up to it.
Most companies want to opt for the free market because the price in the tender route is fixed.What will buyback do for Infosys?
On April 14, 2021, India's second-largest IT company released its fourth-quarter earnings. Although the results did not meet market expectations, the company's in-line contracts and deal closing for FY22 are higher and it is possible that the company would outperform its competitors in FY22.
Despite missing revenue targets, it was able to achieve margin targets in Q4. Furthermore, the buyback of shares worth Rs.9200 crore at Rs.1750 per share, a 25 percent premium from Tuesday closing price, and a Rs 15 per share dividend may have a positive effect on the company.
Any dip in the stock price will be an opportunity for buyers to add the stock to their portfolio and we expect it to close above Rs 1,650 in FY22.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.