Former top executives at Infosys have hit out against critics who had questioned their rationale in demanding the firm buy back some of its shares.
In a piece in the Financial Express , former CFOs V Balakrishnan and TV Mohandas Pai, along with former senior VP DN Prahlad, argued that the slowdown in the firm's earnings growth in the past few years warranted a buyback and said that as CFOs, their opposition to the idea earlier was because the "context of that era" was different.
The trio had earlier shot off a letter to the new Infosys management, saying the company should utilize its Rs 30,000 crore cash chest to buy back shares of about Rs 11,000 crore.
The rationale behind the move was suggested as a measure to bridge the "dramatic valuation gap" between Infosys and its peers.
Infosys shares have consistently under-performed those of its peers in the past few years as growth slowed down at the company once vaunted as the Indian IT bellwhether. During the same time, rival TCS increased the gulf between the two companies' valuation (today, TCS is valued at Rs 4.85 lakh crore compared to Rs 2 lakh crore for Infosys) on account of superior sales and profit growth.
But in the FE column, the former top executives dismissed analyst concerns that buybacks will not do the company any good – that such measures are merely temporary props and stock price movement is ultimately decided by actual financial performance – and cited the examples of Accenture and Apple who executed buybacks in order to boost shareholder wealth.
"Accenture, a company in the same business, has single-digit growth rates and has doubled its market cap using buybacks," the trio wrote. "Tragedy forced a change of leadership at Apple. The incoming CEO was reminded of cash reserves by shareholders and they started a buyback and dividend programme which has met with shareholder approval. Nothing bad has happened to Apple either except becoming the most valued company."
The executives also added that even if Infosys were to buy back shares worth about Rs 11,000 crore, it would still have plenty of cash remaining in its kitty to pursue acquisitions, and cautioned that the firm should be cautious of trying to purchase a large-scale company.
"Big acquisitions are very risky at best. (HP and Autonomy is a good recent example). Assuming that Infosys will not bet all of its cash pile on the big ones, there is adequate money for small ones and hence this 'hoarding' for an acquisition is a flawed argument. Besides, one can always use stock instead of cash," they wrote.
Finally, the trio added that the reason they did not want to "vote with our feet" – a term used to describe exiting a stock -- if they were unhappy with the company's performance was because, having worked for the firm, they were "emotionally attached" to Infosys.
"It is indeed painful to see Infosys lose it position of eminence and play catch up."
Infosys stock price
On August 11, 2014, at 14:10 hrs Infosys was quoting at Rs 3561.75, up Rs 81.40, or 2.34 percent. The 52-week high of the share was Rs 3847.20 and the 52-week low was Rs 2894.00.
The company's trailing 12-month (TTM) EPS was at Rs 185.71 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 19.18. The latest book value of the company is Rs 733.03 per share. At current value, the price-to-book value of the company is 4.86.
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