Analysts estimate that Infosys may offer buyback of shares at ₹1,600 to ₹1,650 apiece
- Infosys announced that it will consider buyback of equity shares during its board meeting set to take place tomorrow, on April 14.
- Analysts estimate that shares may be bought up at ₹1,600 to ₹1,650 a piece.
- According to them, the buyback is not because the management feels that Infosys’ shares are undervalued but because it is as per the company’s payout policy.
- Infosys has thus far given out around 50% in dividend as what is left over will be spent on this buyback.
AdvertisementIndian information technology (IT) giant, Infosys, may announce a buyback of equity shares after its board meeting scheduled for April 14. And, analysts estimate that the shares will be picked up between ₹1,600 to ₹1,650 a piece.
That's a 14% premium on the closing price of Infosys on April 13.
“If you see, Infosys usually spends 85% of its free cash flow five year’s average. This year they've given out around 50% in dividend. The rest of the amount, which comes up to around ₹11,500 to ₹12,500 crore, they will spend on this buyback,” explained Sanjiv Hota from Sharekhan.
Apurv Prasad from HDFC Securities told Business Insider India that the Bengaluru-based tech services major may buy fewer shares this time around.
Why is Infosys buying back shares?
A buyback is when a company purchases free floating shares in the market. A process in which the promoters participate too.
It is normally done at a price higher than what is prevailing in the market. Analysts estimate that Infosys will offer between 10% to 15% premium.
Companies normally offer a buyback of shares to stem a fall in share prices, as many did after the pandemic rocked markets in March last year.
However, since the government announced that dividends will be taxable as per the effective rates rates for corporate shareholders — more commonly known as promoters — in July 2020, some companies have opted for the buyback route to save tax.
“Dividends are not the most efficient method of payouts for a certain set of investors because of the much higher slab rates,” explained Prasad. Dividends are subject to ordinary income tax whereas buybacks are taxed at a capital gains tax rate, which is lower.
|Highest income tax slab||30%|
|Short term capital gains tax||15%|
|Long term capital gains tax||10%|
It also helps the company get rid of any excess cash on the books. It’s common practice for leading companies to have a regular buyback strategy in place. “What happens is that if you don’t give the buyback, there’s a lot more cash which is not yielding high returns,” Prasad explained.
Infosys is not alone in the balancing act of paying out dividends and offering buybacks. Most IT companies do a little bit of both depending on their shareholder profile. “It’s a tender route where the promoters also end up participating,” said Prasad.
TCS, for instance, returned $4.17 billion of cash to shareholders through buybacks and dividends this year.
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