Companies & Sectors
Buyback beckons Infosys to boost shareholder value: ex-CFO
With the Tata Consultancy Services board slated to consider buyback of equity at a meeting on Monday, a former chief financial officer (CFO) of Infosys has said that the Bengaluru-headquartered IT giant too needs to consider the buyback option for "enhancing shareholder value".
 
"It (buyback) is the right thing to do because the IT services industry is transforming from a growth stock to a value stock," former Infosys CFO V. Bala told BTVi in an interview.
 
He pointed out that as per industry body Nasscom figures released on Wednesday, the IT sector is poised to grow at 8.6 per cent in the current fiscal, which is the "lowest ever we have seen". 
 
"Any sensible board will look at and understand the transition to value stock and return more money to shareholders," he said. 
 
Indian IT companies in recent years have seen only single-digit growth, leading to low shareholder returns, which has provoked firms to look at the buyback option as another means of rewarding shareholders.
 
"Lots of things have changed for the industry... earlier we were growing at 40-50 per cent. When you are a growth stock, you require cash for further growth. Also, cash as a percentage of market capitalisation was very low at that point of time," the Infosys ex-CFO said. 
 
Among other IT companies, Cognizant recently announced a $3.4 million buyback, while Wipro and Accenture have conducted their own. 
 
Bala elaborated on the mechanics of this major transformation being witnessed in the IT sector.
 
"Infosys is sitting on $6 million of cash, with a market capitalisation of $32 billion, which is 20 per cent, and growth has come down to single-digit. When 25 per cent of other incomes comes from financial income, you are no longer a software stock but a financial services stock " he said.
 
"When things change, when the context changes you have to understand the transition and look to return more money to shareholders," he added. 
 
He said that both in the near- and medium-term, there is no need to keep large cash for acquisitions or strategic objectives, because the purchase of new technology is very costly. 
 
"All companies have clearly said they don't want yesterday's technology, while new technology comes at a very high price, where your ability to generate returns on top of the purchase price, your IRR (internal return of return), is very limited," Bala said.
 
According to Bala, for companies and boards, whose primay task is to increase shareholder value, buyback would be the sensible course in the current scenario.
 
"I think if you have large cash, you should return money to shareholders. It'll improve returns, improve EPS (earning per share) and generate shareholder value," he said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  

 

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COMMENTS

Krishnamoorthy Padinjara Madhom

3 months ago

I am commenting on the share buy back......
1.If Infosys has excess money it shoud be paid as one time additonal
Divident or issue bonus shares
2.It will help small time investors. Small time investors prefer to retain shares as it fetches good returns to them.
3.Buy back helps high volume share holders and those who
Do not mind selling and a guick 20% profit....
This is my opinion and hope the board will consider the request....

Recent Rally May Not Be Sustainable: Report
The recent run-up in the Indian market seems very pleasing to investors. But is it sustainable? According to a report by Kotak Securites, ‘growth’ stocks continue to trade at rich multiples based on the market’s views of continued low global yields, while ‘value’ stocks have seen a large expansion in their earnings (and corresponding increase in stock prices) due to improved fundamentals over the past two years.
 
However, the Indian market’s rich multiples may not find much support from global or domestic interest rates, according to the report. The recent rally in emerging markets may have largely been driven by the weakness in the US dollar, but global economic data suggests continued economic recovery, which may result in higher global bond yields and monetary tightening by global central banks -- higher short-term policy rates and lower bond buybacks. “Global bond yields have already moved up but uncertainty about the strength of economic recovery in the US and fiscal and trade policies of the US have resulted in broadly stable rates,” says the report. 
 
The Kotak report also argues that “valuations of the Indian market appear quite full at current levels and earnings upgrades look difficult. Domestic macro factors might not see further meaningful improvement given the sharp improvement in the same over the past two years. Interest rates may have scope to fall 25-50 bps on the back of an expected decline in inflation, after declining 175 bps from a peak of 8% in early 2015 when the RBI started cutting rates in the current economic cycle. But the RBI may have limited room to cut rates as core CPI inflation continues to be fairly sticky and it would be quite difficult to bring down CPI inflation to below 4% on a sustained basis. However, an improvement in NPL cycle, finalization of GST rates and favorable monsoon forecasts may be potential positive triggers for the market.”
 
Kotak also believes that the market seems too complacent about the impact of demonetisation and the forthcoming Goods & Services Tax on discretionary consumption demand. There might be some upside risks to inflation from the conversion of large parts of the informal economy to the formal economy due to demonetisation and GST, says the report. The informal sector players may have to raise prices of their products to offset the impact of higher taxes (GST and corporate/income tax) on their overall costs, if and when they become part of the formal economy and start reporting their true incomes and paying full taxes. 
 
“The continued strong inflows into domestic equities by insurance and mutual funds and passive FPI inflows may support the market’s high valuations, even if fundamentals may be less supportive. Liquidity conditions and expectations can only result in temporary ‘mismatch’ between valuations and fundamentals,” the report forecasts. This has led to a rally in emerging markets, which might not sustain.
 
Talking of the banking sector, the report mentions that banks have largely recognised the bulk of the bad assets in the large corporate book and thus, Non-performing Loans (NPLs) may be peaking. “However, the resolution may take time given the magnitude of the problem and limited options.” Kotak believes that there are large risks to the profitability of the cement sector, given large supply-demand imbalance and the impact of demonetisation. “The larger companies continue to lose market share to their smaller but more aggressive peers, which might bring about consolidation in the industry.”
 
Finally, as regards consumer staples, “input prices have increased sharply over the past few quarters and companies have not taken commensurate price increases as yet due to weak demand conditions. A few consumer companies may get some benefits from lower taxes under GST if the GST Council classifies their products in the 18% rate category rather than the 28% one.”

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COMMENTS

Ramesh Bajaj

3 months ago

I had hoped that there would have been a uniform GST, but as events are panning out, it seems inevitable that there will be differential rates if GST. I be

‘Modest growth is expected in Indian exports’
Trade deficit in January  stayed  stable  at  USD10 billion,  the same as in the previous  month,  with  oil  deficit  deteriorating  but  non‐oil  balance improving. Barring engineering goods, which are showing good traction, helped by a favourable base, several other categories, such as leather goods, garments, gems and jewellery moderated during the month. 
 
These are the primary observations of a research note from Edelweiss. Meanwhile, non‐oil/non‐gold imports maintained pace at 6% year-on-year. Going ahead, Edelweiss expects trade balance to hover around current levels. Recovery in the global economy is a boost to exports, but base effect is turning adverse. Thus, stable to modest improvement is the most likely scenario for exports.    
 
A similar trend was observed in imports. Overall, imports growth improved to 7% in January 2017, compared to 6% in December 2016. Non‐oil and non‐gold imports showed a similar pattern. Just as with exports, base effect and rebound in global commodity prices seems to be at play. Specifically in January, gold imports were flat at USD2 billion, while crude oil imports jumped, reflecting rising prices.
Edelweiss observe that it is worth noting that while global industrial activity has picked up, one is yet to see visible pick up in global trade volumes. If one looks at global trade, it has recovered in nominal terms in the past 3‐4 months, but world trade volumes have barely improved.  

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