Infosys’ Rs 9,200-cr Share Buyback Plan

Software giant Infosys has launched a Rs 9,200-crore worth share buyback plan on June 25, wherein the IT firm has planned to buy shares back at a price capped at Rs 1,750 per share.

The approval for the buyback was given in April 2021, while the shareholders gave the go-ahead on June 19. The last date for the buyback would be six months from the date of opening or when the company finishes the buyback process, depending on whichever is earlier.

The Bengaluru-based IT services firm said it would use at least half the amount fixed as the maximum buyback size for the plan; ie, Rs 4,600 crore. It may be recalled that Infosys registered a 17.5 per cent increase in net profit, to touch Rs 5,076 crore for the quarter ended March 2021 from the same period a year ago. The rise in net profits was attributed to the large deal wins of the company. As per Infosys’ Q4 results announcement, Infosys said it won its biggest ever deal, among the 24 other large deals for the quarter, adding up to $2.1 billion. Among the deals, 52 per cent were first-time ones.

What does the buyback exercise entail?

Companies buy back shares in the market at a price that is greater than the market price, for many reasons. According to capital markets regulator SEBI, the buyback lets companies invest in their own growth; when the number of shares outstanding on the market is lowered, the proportion of shares the company owns goes up.

Firms buy back shares either through tenders or via the open market. If the tender method is used, companies have the option to tender some or all their shares at a certain period and at a premium to the price right now. The premium is what draws investors to tender or submit shares instead of holding on to the shares. The other option for companies is to buyback shares on the open market, which is what the current plan is.

Infosys has had two share buybacks in the past; in August 2019, the company bought back over 11 crore shares under a Rs 8260-crore buyback plan while in December 2017, it had launched its first buyback plan worth Rs 13,000 crore.

Why do companies buy back shares?

There are many reasons for companies to opt for a share buyback. One reason for share buyback is when a company stock is undervalued and it feels that its future is in great shape and is poised for profitability. The company may then wish to buy back its shares and sell them at a time when it feels that its shares have more demand.

Yet another reason for a company to buy back shares is when it seeks to boost its earnings per share or EPS. The EPS is a metric that helps investors understand the profitability of a company. When a share buyback is initiated, the EPS value goes up, as there are fewer shares against which earnings are divided.

Infosys’ buyback plan

The other reason is when companies have a large pile of cash and have fewer investment options. Infosys, for instance, has a strong balance sheet with cash and short-term investments accounting for 25 per cent of the overall assets. Also, free cash flow or FCF for Infosys went up 44 per cent year-on-year and the payout was at 94 per cent. These factors were opportune for Infosys to initiate a buyback plan.

The share buyback plan is in line with the Infosys Board’s decision to return 85 per cent of the free cash reserves in five years. In 2019-2020, Infosys increased its capital allocation and said it expected to return nearly 85 per cent of its free cash flow through special and semi-annual dividends, apart from buybacks.

Reports suggest that share buybacks by India Inc rose to a two-year peak in fiscal year 2021, largely led by software services companies. Data cited in news reports shows that in the fiscal year 2021, 61 companies took the buyback route worth a cumulative Rs 39,295 crore, compared to 52 companies making a similar offer worth Rs 19,972 crore in fiscal year 2020.

One of the reasons for the increase in buybacks was that many companies sitting on cash ready for investment were faced with challenges in finding the right options. Another reason for the rise in buybacks in FY21 and the quarters after is that with shareholders having to incur dividend distribution tax, the tax rate for capital gains is low for them when there is a buyback. Buybacks are the route that companies may favour in a bid to reward their shareholders.

Conclusion

IT services firm Infosys has launched a Rs 9,200-crore share buyback plan, the third such since 2017. The company’s share buyback plan is aligned with its Board decision to return 85 per cent of free cash reserves in five years by way of dividends and buybacks.