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Infosys, Cognizant plan big buybacks to cut cash pile

INDIA-ECONOMY-CURRENCY

Bengaluru: Infosys and Cognizant are considering massive share buybacks as a way to restore investor confidence and engage in a more tax-efficient way to return money to shareholders. Infosys is planning up to a Rs 12,000 crore ($1.8 billion) share buyback, a move that is pending final nod from its key shareholders, including the founders. Sources said the company is currently discussing the buyback process–whether it should be an open tender or a market buyback–as also the premium to be paid.

Speculation is also rife about an imminent share buyback by Cognizant, partially to address the concerns from activist investor Elliott Management, which purchased a $1.4 billion stake in the company last year.

Investors who have seen the market value erode on the back of tepid growth in the recent past are turning attention to the inefficient capital structures (deployment) of several IT majors, some of which have shied away from large, transformational M&As. “They don’t need capital to induce growth either. In such a context, investors are asking these cash-rich companies to give them back money in a tax efficient manner,“ said a source familiar with the matter.

Infosys is sitting on a cash pile of $5.25 billion (over Rs 35,000 crore). If a buyback happens, it will be the first in the history of the 35-year-old company . It had earlier overturned several requests from investors to consider a buyback. Three years ago, former CFOs V Mohandas Pai and V Balakrishnan had written to the board proposing a Rs 11,000 crore buyback.

Infosys’ share price has dropped to Rs 944 apiece from Rs 1,150 as of February last year. IT companies are being buffeted by the sea change in technology-especially the moves into cloud, mobile, automation and analytics–and, more recently , by the Trump administration’s actions that suggest a more stringent evaluation of the H-1B and L-1 visa programmes.

Shailesh Haribhakti, founder and chief mentor of Baker Tilly Desai Haribhakti Consultants (DHC), said the growth prospects of IT companies have become uncertain.“You combine that with all of them having a significant cash pile, and it’s an instant recipe for buyback,“ he said, adding that IT companies that are significantly owned by private equity firms will have significant pressures to buyback.

Last year, Wipro approved a proposal to buy back shares worth Rs 2,500 crore, representing 1.62% of the total equity capital.

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