Infy ex-CFOs demand Rs 11,200-cr share buyback

Balakrishnan, Pai write to board, seek correction in 'dramatic valuation disconnect' between shares of Infosys and its peers

It has been only five days since he took charge as Infosys' first non-founder chief executive but Vishal Sikka has already started experiencing the first signs of pressure - from some minority shareholders who were once key executives of the information technology services firm.

Three former senior employees of Infosys -former chief financial officers T V Mohandas Pai and V Balakrishnan and former senior vice-president D N Prahlad - have written to the company's board to "immediately" consider a buyback of shares. They believe the company must do so because there is a "dramatic valuation disconnect" between the shares of Infosys and its peers, and this needs correction.

Sikka can, however, take heart from the fact that he is in illustrious company. Timothy D Cook, who succeeded Steve Jobs as the CEO of Apple, also had to go for a massive share buyback programme - of around $14 billion - soon after taking over, following pressure from shareholders.

Pointing out the "abrupt nature" of management change at Infosys had initially raised "serious concerns, not only in our minds but among many stakeholders", the letter said the board should go for a Rs 11,200-crore (roughly 40 per cent of the company's current cash and cash equivalents) share buyback to show confidence in the company and its new CEO. A copy of the letter has been reviewed by Business Standard.

In his interaction with the media soon after taking charge as Infosys CEO earlier this month, Sikka had said cash was something very important for the company to overcome bad times. "We have a wide range of options open to us. I think the focus on margins and having enough cash available to weather storms is a very important criterion. There are many dimensions that we will consider over time but I definitely do not rule out acquisitions."

Pai was Infosys' CFO before becoming its executive director responsible for human resources, administration and training. Balakrishnan, who quit the company last year, had long been the CFO and a board member at the company. Prahlad was among the first few employees of the company.

Interestingly, neither Pai nor Balakrishnan had favoured shareholders' demands for share buybacks during their respective stints as CFO.

In reply to an emailed query from Business Standard, a spokesperson for Infosys said: "The Infosys board and the management receives requests on a variety of subjects from shareholders and investors, on an ongoing basis. These are addressed by the board and the management in due course."

"In this particular case, we have received this request only from three retail investors. Should there be any development that will impact our shareholders, we will immediately inform the regulatory bodies and shareholders on priority," the spokesperson added.

The letter had some strong words for the Infosys board. Charging it with "wealth destruction", the letter said the Infosys board "had been highly conservative in the past and a continuation of such extreme conservatism at the cost of destroying shareholders wealth is not in the best interest of the company".

While the founding team had demonstrated a consistent financial discipline, which resulted in investor community not pursuing this (the buyback) proposal aggressively with the board, the letter said. "However, with the change in management resulting in all the founding members departing from the company increased the concerns of shareholders and (therefore, there is) an urgent need to consider and address this issue," it added.

The three executives also said the return on equity of the company was consistently declining and the quality of earnings was also declining, with close to 20 per cent of profit before tax coming from interest income.

The three, now minority shareholders in Infosys, have also suggested that the buyback should be at the 52-week-high price of Rs 3,850 a share. "Infosys should also announce an ongoing buyback programme to the extent of 40 per cent of the previous year's net profit on a consistent basis," they said in their letter. The letter also said the three former executives had detailed discussions with a few large institutional shareholders, who also supported the proposal.

Over the past three years (from April 2011 to July 2014), the BSE Sensex gave returns of 34.4 per cent, while the BSE IT index gave 47.9 per cent, the letter said. Among Infosys' IT sector peers, the share price of Tata Consultancy Services increased 119.2 per cent during this period, while Infosys' shares rose only four per cent. Infosys has been receiving share buyback requests for several years now, considering the company's robust cash position. As on June 30, 2014, Infosys held cash and cash equivalents of around Rs 30,000 crore. The company has not gone for a share buyback since its listing on the stock exchanges in 1993.

Infosys had so far not articulated its strategy for use of its cash effectively, the letter said. "Given this massive net cash position and robust net income generation, Infosys is perhaps the most overcapitalised company in the Indian corporate history, from our perspective… We believe the combination of the company's unprecedented cash levels, robust net income growth and tremendous borrowing capacity, being a zero-debt company, provides more than enough cash for any necessary ongoing strategic investments for innovation or merger & acquisition."

Besides the company's strong cash position, the letter cited other reasons, such as its traditional belief in increasing shareholder wealth and the need for enhancement of earnings per share, as reasons why the company must look at a buyback.
A BOLD CALL

Why should Infy go for share buyback?

• Management change at the firm is inevitable, but its abruptness has raised concerns in stakeholders' minds
• From April 2011 to July 2014, BSE gave 34.4% returns and BSE IT index 47.9%; TCS' share price rose 119.2%, but Infosys shares rose only 4%
• Company holds cash and cash equivalents of around Rs 30,000 crore and generates operating cash flow of Rs 12,000 crore a year. But there is no clearly articulated strategy for effective use of cash
• Return on capital employed has fallen to 36% from 41% in two years
• Company has not made any big acquisition for many years
• Infosys is perhaps the most overcapitalised company in Indian corporate history

What do former executives want Infy to do?

• Immediately go for a share buyback to the tune of Rs 11,200 crore, roughly 40% of the existing cash and cash equivalents
• The buyback should be at the 52-week-high price of Rs 3,850 a share
• Company should announce an ongoing buyback programme to the extent of 40% of the previous year's net profit on a consistent basis