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

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