Infosys is the second-largest information technology (IT) company in India. The company primarily caters to bank financial services and insurance (BFSI), retail, communication, manufacturing & hi tech companies and organisation. Infosys is also a cash-rich company, i.e., it usually generates a free cash flow of around 75-100 percent of its profits. Thus, it also keeps distributing most of its cash to shareholders via dividends and share buybacks.
Share buyback refers to a company buying back shares from shareholders at a premium to the prevailing stock price to incentivise them to tender their shares. There are two modes of share buyback: tender route and open market route. In the tender route, the company buys shares from holders who tender their shares at a fixed price. While in the open market route, the company buys all shares from the open market at variable rates over a period.
In December 2022, Infosys share announced to buyback of Rs 9,300 crore worth of shares by an open market route at a maximum share price of Rs 1,850. By mid-January, it had bought 3,26,87,500 shares at an average stock price of Rs 1,498.76. Buyback – by any route – is good news for the stock and shareholders. In the tender route, by fixing the price at a premium the company tells the market that it sees the fair value of the stock much higher than the prevailing price.
This leads to a rise in share price as any shareholder will rather sell their share to the company than in the market as it yields a better price. Even in the open market route, as the company keeps buying shares in the market, it creates an artificial demand leading to higher stock prices. Crudely speaking, shareholders tend to gain more from the tender route than the open market route. As you can see above, the average acquisition price for Infosys is lower than the maximum price it fixed for the buyback.
That means, the company can buy shares at a lower price and a shareholder doesn’t gain much, relatively speaking.
Analyst recommendation
Thanks to the ongoing buyback and better-than-expected earnings reported by Infosys for the quarter ending December 2022, analysts at ICICIdirect remain bullish on the Infosys share. They have a ‘buy’ rating on the counter with a 12-month target price of Rs 1730. This means a potential upside of 15 per cent from the mid-January level. Analysts said the differentiated digital and cloud capabilities of the company will drive growth.
They added that growth has remained broad-based and deal momentum robust, with digital transformation rapidly scaling up across verticals and regions. The broker expects Infosys to post industry-leading revenue growth at a 14.4 per cent compound annual growth rate (CAGR) over FY22-25. It also expects double-digit return ratios, strong cash generation and healthy pay out.