Infosys ₹9,200 cr share buyback to open tomorrow. What should investors do?

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IT services major Infosys’ share buyback programme worth Rs 9,200 crore will commence tomorrow, Friday 25. The company had approved its plan to buy back shares at a maximum price of Rs 1,750 per share during the Q4 results for FY21. Shares of Infosys hit a new high of Rs 1,539, up 2.5% on BSE in intra-day trade on Thursday. In the past month, Infosys has outperformed the market by surging 14%, as compared to a 4% rise in the S&P BSE Sensex.

Buyback details The buyback will begin on June 25, 2021, and end on December 24, 2021, or when the corporation completes the buyback by deploying the amount equivalent to the maximum buyback size, whichever comes first.

What is share buyback?

In simple terms, buyback refers to the practice of a company buying back its own shares from the market. This is done for a number of reasons such as to enhance the value of remaining shares, to increase the overall holding value, or to distribute less dividend in the forthcoming instances.

Buyback reduces the number of shares accessible on the open market and therefore is expected to improve return on equity through the distribution of cash and improve earnings per share by reduction in the equity base in the long term.

Shareholders of the company can either sell their equity shares and receive cash via a buyback or get a resultant increase in their percentage shareholding in the company post the buyback, without additional investment.

Why is Infosys buying back shares?

From FY20, Infosys had enhanced its capital allocation plan and had said it will return 85% of free cash flow cumulatively over a five-year period via buyback and dividends. The company also said that the buyback will be done from its free reserve.

Companies with a huge cash pile and few investment alternatives are increasingly considering repurchase offers. Infosys has a lot of cash on hand, so it was an obvious choice for a buyback. In addition, a buyback made more sense from a tax standpoint than a special dividend.

Infosys will utilise at least 50% of the amount earmarked as the maximum buyback size for the buyback i.e. Rs 4,600 crore. Based on the minimum buyback size and the maximum buyback price, the company will purchase an indicative minimum of 2,62,85,714 equity shares.

Should you participate in Infosys buyback?

A buyback usually benefits investors as the company usually pays a higher price for equity shares than the market value. Your shares will be sold in the repurchase process, and the funds will be directly credited from your bank account, depending on the buyback acceptance ratio. Any shares that are rejected will be returned to your demat account, where you can sell them on the open market or keep them for long-term benefit.

Experts suggest investors who have a short-term view can participate in the buyback. However for long-term investors, given strong revenue growth and deal momentum and faster recovery in developed markets, one may continue to stay invested.

Infosys share buyback history

This will be the third Infosys share repurchase if it goes through. In 2017, Infosys conducted its first share repurchase, purchasing a total of Rs 13,000 crore in shares at a price of Rs 1,150 per share. In 2019, Infosys bought back Rs 8,260 crore in shares at a price of Rs 747 per share in its second buyback.