Mumbai, Aug. 6: The stock markets have given a thumbs-up to a demand by some former Infosys executives to buy back shares of the company.
Experts, however, are not impressed. They said Infosys should put the cash on its books, estimated at over Rs 25,000 crore, for better use such as an acquisition.
A market expert, who did not wish to be identified, criticised those seeking the buyback. “Why are they making the proposal now. Why were they quiet when they were in the company or when N. R. Narayana Murthy was at the helm till recently. By doing this, they are only putting pressure on the new chief executive officer (CEO), which is not correct,” the expert said.
Vishal Sikka took charge as the CEO and managing director of Infosys from August 1.
Acquisitions have not been much on Infosys’s radar, with the last buy being of Lodestone for $350 million in 2012.
The company rewards its shareholders by giving around 40 per cent of its profits as dividends. However, it has not declared a buyback since it got listed in 1995.
Former Infosys board member V. Balakrishnan, former director T. V. Mohandas Pai and former senior vice-president D. N. Prahlad have written a letter to the Infosys management, seeking a large buyback worth Rs 11,200 crore
The letter, written on July 29, said though Infosys believed in increasing shareholders’ wealth, its share had heavily under-performed in the past three years and had “resulted in wealth destruction”.
The call for the buyback saw the shares of Infosys gaining more than two per cent on the stock exchanges today. On the BSE, the scrip rose Rs 70.45 to Rs 3,574.70 apiece.
Companies use buybacks as a tool to prop up share valuations. Under a buyback programme, shares bought will be cancelled. This reduces the number of outstanding equity shares, leading to the increase in the earnings per share.
“Though one of the key question the new CEO will have to consider is how to utilise the cash on its books, it should be put to better strategic use, rather than a buyback,” Ankita Somani, IT analyst at Marwadi Shares and Finance Ltd, said.
The buyback proposal comes at a time the market regulator brought in new norms last year, making it mandatory for companies to purchase at least 50 per cent of their offers. The norms have not deterred companies from announcing such programmes.
“Now, with the management exuding confidence and Infosys’ share price still depressed, there is a need for the board to announce a large and consistent buyback programme to show confidence in the management and the business model,” it added.
On the volume front, 1.27 lakh shares of the company changed hands on the BSE, while over 22 lakh shares were traded on the NSE during the day.
The trio want the buyback at the 52-week high price of Rs 3,850 per share. They also want Infosys announcing an ongoing buyback programme to the extent of 40 per cent of the previous year’s net profits on a consistent basis.