Infosys, India’s No.2 IT services company, named Salil S Parekh as chief executive on Saturday, picking an outsider for the job for a second time and handing him the twin challenges of reviving growth and forging peace between its founders and board following a public spat.Parekh, who is joining from consultancy firm Capgemini where he was a member of its group executive team, has been given a 5-year term effective Jan. 2. This author decodes what lies ahead for Infosys.
Since the resignation of its CEO in August, the stock price of Infosys
has recovered around 14 percent, outperforming the Sensex. The buyback program of Infosys
(buyback of 11.3 crore number of shares at a price of Rs.1,150 per share for total value up to Rs.13,000 crore) opened on November 30, 2017. This offer is still at a significant premium of 32% when the market panicked on the eve of former CEO Vishal Sikka's resignation. Infosys’ share price movement is an opt example of market’s anxiety to overreact to both good and bad news in disproportion to what fundamentals would dictate.
However, the question is what lies ahead for Infosys
post its buyback offer?
Of course, any major wealth creation opportunity in the large IT stocks -including Infosys
- is unlikely at least for the next three years. The slowdown in the global economy and the base effect of the IT exports would make it difficult for the IT exports to grow in strong double-digits in the near future. Infosys
itself has projected its revenues in both and rupee terms to grow in single digits in FY2018.
could remain as a wealth protector in the Indian equity markets for a while and even beat the inflation rate quite consistently over the next two decades. First of all, it has emerged as an institution over the last two decades with an annual turnover of around Rs 68,000 crore. It has already proven that it can successfully manage leadership issues.
It is a cash-rich company with cash and cash equivalents of over Rs 41,000 crore. Even after the buyback, it would be left with a cash pile of around Rs 26,000 crore. Its annualized net profit stands at around Rs14,000 crore for FY2018. Even without any significant growth in profits, Infosys
can do a buyback of about 5% of its paid-up capital almost every year or at least repeat quite frequently in the future till the product lifecycle of IT services business hits the right-hand side of the Bell curve. The same would be EPS accretive in the long run in a substantial manner.
While largely foreign investors are acquiring mid-sized IT companies (Poalris, Mphasis, etc), there is a compelling reason (poor single-digit organic revenue growth) for the top three Indian IT conglomerates to consider M&As for expanding revenues and market capital. Hence, with the kind of cash on the books, Infosys
can also transform itself in the medium term by choosing to grow through the inorganic route.
Infosys's land bank is believed to be more than what the largest real estate company holds in this country. Urban land is expected to be extremely scarce over the next two decades as both population and economy of the country are continuously growing. Today Indian economy has emerged as predominantly a service economy with 65% share in the GDP. Indian stock market also increasingly rewarding the stocks of service sector with super rich valuations. If the IT services hit the right-hand side of the bell curve, Infosys
could transform itself into a great service provider using super rich land assets, which are predominantly in core urban centres. Hence, Infosys
could emerge as a solid defensive play for the long-term.
Disclosure: G.Chokkalingam and Equinomics / Associate Company do not hold shares of Infosys.
However, Equinomics has received the advisory fee for rendering investment advisory services to one of the investment companies of one of the promoters of Infosys.