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Here’s what investors should consider in the Infosys buyback

Infosys Ltd. has started buying back its shares as of Dec. 7, through an open market purchase. The repurchase programme helps investors gain a certain level of confidence and provides some sort of floor to the stock price.

For example, Infosys bought shares worth Rs 200 crore at an average price of Rs 1,615 per share. However, the maximum price for the buyback is Rs 1,850 per share.

The buyback will continue for a maximum period of six months. Infosys will buy back around 5 crore shares, comprising approximately 1.19% of the paid-up capital of the company as of Sept. 30 on a standalone basis at a maximum price of Rs 1,850 per share.

However, the number of equity shares bought back could exceed the maximum limit in case price falls below the floor price, which is Rs 1,850. Total buyback offer size is Rs 9,300 crore.

Independent expert Mahantesh Sabarad recommends not to tender shares in the Infosys buyback. He said, “As per the historical trend, expect the stock to inch higher post buyback as earnings per share go up, the balance sheet looks better, the return on equity looks better, and the buyback offer price is much above the market price. So you can expect to see a big premium.”

Rahul Jain, vice president of research (IT) at Dolat Capital, said as of today, he has a target price of Rs 1,650 on Infosys, “Hence, from a pure upside perspective, I don’t see much. With Infosys being a key component of the index, clients could continue to own it.”

The next trigger he is watching for is the FY24 forecast by the company. On an absolute basis, Infosys is not a big buy, and he maintains it as a preferred pick along with HCL Tech.

Infosys Announced Four Buybacks Since 2015
This is the fourth buyback by Infosys in the last five years. The last two were completed within two and a half to five months.

Sabarad said, “The Infosys buyback could be done within 40-45 days or even earlier than the six months, taking into consideration they collectively did Rs 200 crore at Rs 1,615.5 per share, which is relatively large for a single day.”

Infosys was trading at Rs 1,419.75 per share when the buyback was approved by the board, which then offered a buyback premium of around 30%. Since the approval of the buyback, the stock has inched higher. The buyback premium has come down to around 15% at the current market price of Rs 1,612 per share.

“The current market price versus last buyback price is broadly at Rs 1,600 versus Rs 1,650, whereas earnings have gone up by 10%,” Jain said. “Hence the implied effectiveness of the buyback is better than last buyback. The buyback price is better than the last time and is a positive event, though as an individual event it is not big.”

“If you look at the last five years, the last four buybacks would have taken up 8–9% of the total equity base of the company, which implies a perpetual benefit for the residual shareholder after the buyback,” Jain said.

For a company like Infosys with 7-10% earnings growth, 2-3% dividend yield opportunity, and a reduced equity bases over a period becomes accretive to overall earnings giving 12-15% return opportunity to long-term investors, says Rahul Jain.

For all buybacks, the stock has a tendency to rise post-buyback events as EPS goes up and the balance sheet and ROE look better. Usually, the share price ends up higher after the buyback event. “If this theory is right, then we may see a similar phenomenon at Infosys as well,” said Sabarad.

He is of the view that it does not make sense to offer Infosys in the buyback, as it is not really for the investors. It is done to dilute the equity for the employee stock ownership plan mechanism, which needs to be absorbed. Bloomberg

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