Saturday, August 19, 2017

Should you Subscribe to the Infosys Share BuyBack?

Infosys has been in the news over the past couple of days for different reasons. Their CEO Mr. Vishal Sikka just resigned citing constant malicious comments & distractions from founders and to say that the company stock has taken a beating would be an understatement. Investors lost about 9% of their stock value in a single day and things aren't looking that great until the new leadership information is announced. 

While this is bad news for the shareholders of the company where I started my professional career, there was also news that Infosys is announcing a share buy-back scheme. By the end of this article, hopefully you will be able to decide whether to subscribe for this buy-back (if you hold Infosys shares).

What is a Share Buy-Back?

A share buy-back is an exercise where the promoters of the company buy shares from the open market at a pre-determined price. This will increase the promoters holding (% shares) and reduce the open market holding. 

Why do companies do Share Buy-Back?

Companies usually resort to share buy-back for a few major reasons (more than one reason usually applies)

  1. Heavy cash holding which the company doesn't want to distribute as just dividend
  2. Reduce open market holding of company stock and increase promoter holding 
  3. Increase Earning Per Share (EPS) and other financial ratios 
  4. Boost stock price and improve market sentiment (at times of uncertain future) 

How much shares is Infosys buying back and at what price?

Infosys is proposing to buy back shares not exceeding 13,000 crores at a price of Rs. 1,150/- per share. This would account for about 4.9% of the company's paid up capital. The record date for this scheme will be announced in the future. 

Is 1,150 a Good Price?

Just purely going by the closing price from yesterday (18 Aug) where the stock closed at Rs. 923.15/- which was about 97 rupees lower than its previous day close price, the 1,150 is almost a 24% premium which would seem like a good deal. But, we are ignoring the fact that the stock took a beating of 9% just in a single day. So, if we count against the last traded price from the day before, the premium is only around 12%

If we take into account HCL and TCS share buyback as an example from earlier this year the premium was 17% & 18% respectively and there wasn't much bad news (like the CEO Resigning) with either company. 

Before news of Sikka's resignation broke out, industry experts expected a price of around Rs. 1200 to 1300 for Infy's buy back scheme. 

Is it a good idea to subscribe to the Infosys share buyback scheme?

Yes, it looks that way. There are two main reasons why I say this...

Firstly, the company's short-term future prospects don't seem fantastic. The heat between the founders and the board is obvious and with a very high profile resignation like Mr. Sikka's, it would be very hard to find a suitable replacement. 

Secondly, the stock market usually doesn't react well when a company goes through this type of turmoil and the stock prices take a beating. Remember the Satyam Computers fiasco? Although the situation at Infosys is hardly even 10% of what the promoters of Satyam did, am just trying to highlight that in the coming days the stock is definitely expected to take a beating. Until the replacement for Sikka is identified/announced and things stabilise (maybe 6-12 months from now) the stock price may not recover so much. 

If you are someone who purchased the stock in the last 12-24 months, chances are your purchase price will be close to 1150 or even lower. So, you should exit the stock at this price and can reconsider buying the stock in future once the situation becomes clearer. If your investment price is much higher than 1150 then the decision is yours - whether you want to cut your losses and exit now or wait for the stock to bounce back. 

Some last words

Am not suggesting that we write off Infosys as a company or its stock. The past few years haven't been that great for Infosys and it will take a lot of hard work to bring the company (and its stock) back to its former glory. So, in the coming 1-2 years the stock is not expected to outperform even its peers so the current buy-back would be a decent way to exit the company and cut our losses. Of course, the company is only buying back 13,000 crores worth shares so, if you are really keen on the buy-back make sure to subscribe during the first few days to increase your chances...

Note: Stock buy sell recommendations cannot be generalised. Kindly review your individual financial situation before you decide to buy or hold or sell any share. The author DOES NOT hold any shares in Infosys and would not be liable to any potential losses you may incur owing to your decision to subscribe or ignore this share buy-back scheme

Saturday, August 12, 2017

Investment Basics

Every kid from the 80s and 90s that grew up watching disney cartoons on TV (way before iPads and youtube took over entertainment) would remember Scrooge McDuck - the rich duck who swam in a big vault full of gold coins and wished we had so much money. He was a penny pincher who hoarded money like there was never tomorrow. We on the other hand, spend there is no tomorrow and barely invest. Even if we do, most ignore the basics and go with hearsay. So, I wanted to post something that would go back to the basics of Investing and guide you on how to get started. 

Before we begin: Starting late is better than not starting at all. The important thing is to start now and keep going... 

Basic idea 1: Start small and do it regularly

When I started my career 14 years ago, I was sure than once I had 2-3 salary increments my cashflow situation would improve and a lot more money would be there to invest and spend. Sadly, more income doesn't really mean more money. As my income grew, so did my commitments and the income/expenditure race will be neck to neck forever. So, if we wait to have a big lumpsum of cash before we start investing, it would be a never ending story. 

Don't worry about saving up a lot of cash to start investing. You can start small. Most banks in India allow you to start recurring deposits for as little as 100 rupees a month (some banks ask 500 but thats not the point). Almost all mutual funds allow SIP Investments starting from 500 or 1000 rupees. Even DEMAT brokerage houses these days have started regular saving/investment options in bluechip stocks in either the BSE or NSE by investing a small amount each month. There are plenty of options available in the market. Plus, the longer you stay invested, your money grows that much more. Heard of the term "Power of Compounding"? 

Basic Idea 2: Start with what you know

Once you decide to invest, the biggest problem or fear people have is our individual knowledge in investments.

Yes, it is very true that you need a lot of technical know-how to actually buy/sell specific investments at the most opportune moment to make the most money. We are not talking about that. There is a plethora of information on the world wide web. I have published dozens of articles about different investment products from bonds to equities to insurance linked investments etc. There are thousands of my fellow bloggers who write stuff every day. Use google, start reading, learn as you go... 

If you don't want to pick and choose individual investments, go for mutual funds. Choose a few good mutual funds where the fund manager performs the due diligence and invests in the best possible avenues. In parallel spend time understand financial statements, investment philosophies and rationale to keep yourself abreast of the developments in the world markets. 

Lack of knowledge should never be a deterrent to stop you from investing. Even if you feel you lack the know-how to pick & choose a stock or mutual fund, go for a bank deposit either fixed or recurring. You get guaranteed returns (that may fail to stay at par with inflation) but still you are actually saving money rather than spending. Thats better isn't it?

Basic Idea 3: Balance your risks

Yes, investing may be risky, but then so is driving a car or crossing the road. We see news of accidents every day on our roads, but has that stopped us from driving or commuting to work? People don't mind riding a motorcycle without a helmet or a car without a seatbelt which could potentially endanger their lives however, when it comes to investments or losing money, the word RISK becomes a showstopper. 

Without deviating too much from the topic at hand, what am trying to get to is the fact that, there is risk in everything. Risk of losing money in investments is very real but that shouldn't deter us from investing.

You can build a portfolio of investments spanning across various asset classes and choose ones that you are most comfortable with.  In my articles on Investment Portfolio, I have suggested three categories - Aggressive, Balanced and Conservative. Choose the style that most suits your risk appetite and go for it. 

Basic Idea 4: Don’t follow the herd

Always do your due-diligence and homework before you commit to investing into any asset or product. Just because everyone is doing it doesn't mean its right. When it comes to our hard earned money, we are the only one that knows how hard it was to actually earn that money. So, if we are going to lose it, it should be out of our own volition rather than following someone else's idea because we were too lazy to think by ourselves. 

Choose an investment approach & style from the 3 groups i mentioned just now AggressiveBalanced and ConservativeFormulate a strategy and start investing by taking tips from the ideas 1 & 2 and start investing. 

Water cooler gossip is one of the main reasons why people lose money in the market. My friend who works in the accounting department overhead one of his colleagues talk about the next best investment product in the pantry so am gonna invest 25000 rupees of my hard earned money into Investment X. Does that sound logical to you?

Basic Idea 5: Don't be shy to seek help. 

As mentioned in Idea 2, there is a ton of help available in the market. When you need help, ask for it. Remember, good financial advise is seldom FREE and free financial advise is seldom GOOD. If you want proper advise, sign up for a professional consultant who will suggest the best investment options for you, for a fee. If the consultant is getting a fee from an investment company instead of you the customer, his loyalties would lie with the company not you. 

Some last words 

Yes, I know that all this is easier said than done, but certainly not impossible. As a personal finance blogger, am guilty of doing the mistakes I advise my readers not to. But, those mistakes were the lessons on top of which my advise is based so, am not just blabbering some bs to fill a blog post. 

After all, you could always test the water by investing a small amount of money on a regular basis in a disciplined manner until you become more comfortable with the idea of investing. The idea here is to start small, but do it regularly and am sure the results will be astounding...

Good Luck..
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