Infosys Buyback: How Will it Impact Shareholders?
Infosys share buyback
With its September quarter earnings, Infosys announced that it will buy back shares worth Rs 9300 crore. Infosys shareholders are waiting to participate in the buyback. In this article, we will talk about how investors can participate if they can.
Infosys' share price has fallen nearly 20% in 2022 compared to the IT sector's fall of 16%. Despite the fall this year, Infosys shares have given over 200% returns to investors in the last five years. On December 7, the company started the buyback process. Let us look at the details.
What is a buyback?
When a company has excessive profits, it can return the profits to the shareholders in two forms - Dividends or buybacks. The latter is a process where companies decide to purchase their own shares from existing shareholders - through an open market or a tender offer.
In the tender offer, investors can tender their shares with the company. The tender price is usually higher than the current market price. In the second option, the company buys shares from the open market through the stock exchange. The price, in this case, varies - however, it will be lower than the upper limit set by the company.
Why is Infosys buying the shares back?
In 2019, Infosys promised that as part of its annual exercise, the company will return 85% of its free cash to investors. The company has free cash, and it is returning to investors via a buyback. Infosys consolidated cash and investments stood at Rs 38,921 crore in Q2FY23 against Rs 34,854 crore in Q1FY22.
Why buyback and not dividends to return the free cash? The dividend route does not help the company's share price go up. Instead, historical data suggest that after the record date, the share price falls. On the other hand, buyback helps the share price go up.
When Infosys announced that it will buy back shares worth Rs 9300 crore with an upper limit of Rs 1850, it gave investors confidence, and many investors bought shares. It helps increase the share price.
Earning Per Share (EPS) is a crucial parameter investors consider before buying a share. When Infosys rewards investors via the buyback route, it increases the company's EPS. Let us understand with an example. Assume Infosys has only 100 shares and makes a profit of Rs 5000. The EPS, in this case, will be Rs 50. However, when it buys back 20 shares, the total available share in the market is only 80, and the EPS changes to 62.5.
How to participate in Infosys share buyback?
As mentioned earlier, Infosys is buying back shares via the open market route. Therefore, investors cannot sell the shares directly to the company. All the transactions will happen via exchanges.
Infosys will buy shares on the exchanges from investors looking to sell shares at the market price. The company will buy shares worth Rs 9300 before June 6, 2023.
The buyback has already started. On the first day (7 Dec), the company bought shares worth Rs 202 crore. On 9th December, the company again purchased 12,48,000 shares, with 25,000 and 12,23,000 from the BSE and NSE, respectively. The average buying price was Rs 1,586.46.
Analysts review on Infosys share
JM Financials: The brokerage firm has given a HOLD call with a target price of Rs 1640 per share. The firm said that the higher revenue share from the US and lower exposure to troubled verticals place the company in a better position to navigate the current challenges. It also added that Infosys is currently trading at a 23% premium versus its past 5-year median. The brokerage sees limited re-rating potential in the near term.
BNP Paribas: The brokerage house has given a BUY rating with a target price of Rs 1585 per share. The firm said that the decline in global economic activity and GDP growth, margin pressure from increased competition, sustained INR appreciation vs the USD, and current cost inflation seen by IT services companies not getting fully offset by aggressive fresher hiring, INR depreciation, and price hikes.
AUM Capital: The firm has given a BUY rating with a target price of Rs 1937 in the next 9-12 months. The reason cited for the buy call - the company has accelerated deal win momentum through engagement with deal advisors, consulting firms, and private equity players. Also, Infosys' operating margin for the last quarter increased sequentially by 140 bps to 21.5%. Large deal TCV for the quarter was robust at $2.7 billion, the highest in the last 7 quarters.
ICICI Direct: The firm has given a BUY rating with a target price of Rs 1760 per share. The trigger for higher growth is differentiated digital and cloud capabilities to drive growth, growth remaining broad-based and deal momentum robust, with digital transformation rapidly scaling across verticals and regions.
This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.