Board vs founder war: Is Infosys stock a good contrarian pick?

Infosys Stock fell 9.6% last Friday consequent to the announcement of resignation of its CEO, Vishal Sikka. Subsequently on Saturday, as proposed earlier, the company announced buyback of 11.3 crore number of shares from investors at a price of Rs 1,150 per share for total value up to Rs 13,000 crore through a tender offer on a proportionate basis. This is 4.92% of total paid up capital and at a premium of 24.5% on Friday’s closing price.

We maintain our view that the wealth creation opportunity in the large IT stocks is not there at least for the next 3 years. 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. However, we believe that the reaction to the stock on Friday was largely because of fear factor and it does not deserve such punishment:

Infosys has emerged as an institution over the last 3 decades: With an annual turnover of around Rs.68,000 crore, a net profit of around Rs 14,000 crore and an employee base of around two lakh, it can easily attract a suitable talent.

In our view, a company, which spends over Rs 37,000 crore per annum towards "Employee Benefit Expenses" would not find it difficult to attract the suitable talent. As per the latest media reports, Infosys has already started look out for the CEO;

It is a cash-rich company: Even after this buyback program, Infosys still would have a cash of around Rs 26,000 crore as the cash reserves at the end of June 2017 was Rs.39,335 crore. At the end of the first quarter of FY2018, the cash generated from operating cash flow was Rs.3,598 crore. The operating cash flow as percentage of net profit remained over 100% for the 4th quarter in a row. The yield on cash for the quarter was 7.07%.

Theoretically speaking, Infosys can do a buyback of about 5% of its paid up capital almost every year as it is expected to generate an annual profit of around Rs 14,000 crore at least for the next 2 to 3 years (i.e. till the fortunes of the IT industry dramatically changes). The same would be EPS accretive – even if its net profits grow in poor single digit, its EPS can grow quite significantly due to buyback plan. In case, it doesn’t repeat buyback of shares regularly, then its dividend payout can go up quite consistently and the dividend yield can improve close to 4% in the next 3 years on the current market price;

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