A share buyback to the tune of USD 2-3 billion (Rs 12,000-18,000 crore) would boost earnings-per-share by as much as 1.4-2.2 percent in fiscal year 2016 while lifting return-on-equity by 4 to 7 percentage points, according to a research report by Morgan Stanley.
This could increase the fair value of Infosys stock by about 10-20 percent, leading to a rerating in the price-to-earnings multiple, the firm said, which has a price target of Rs 4,000 crore.
Infosys has never declared a buyback in its history though the company came under pressure to declare one from former chief financial officers V Balakrishnan and Mohandas Pai who wrote a letter to it recently.
Once a bellwether of the Indian IT industry, Infosys' growth rate has fallen behind larger rival TCS' over the past several years, which has led analysts to put pressure on the conservative company to put to better use its Rs 30,000-crore cash pile – such as on acquisitions or share buybacks.
The former CFOs had said the company could buy back shares worth up to Rs 11,000 crore, a move they said could bridge the "dramatic valuation gap" between Infosys and its peers.
Infosys shares have consistently under-performed those of its peers in the past few years as growth slowed down. Today, TCS is valued at Rs 5.27 lakh crore compared to Rs 2.09 lakh crore for Infosys thanks to its superior sales and profit growth record recently.
Recently, Infosys did increase its dividend payout ratio (the percentage of annual profits to pays out to shareholders via dividends versus what it retains) from up to 30 percent to 40 percent. But this, Morgan Stanley, believes should be even higher.
However, to be clear, Morgan Stanley said that it does not believe that a buyback could be a significant driver of a rally in the share price and has thus kept it out of its valuation estimates, especially given the fact that the new growth-focused management led by new CEO Vishal Sikka, has not given any indication of undertaking a buyback.
"We have seen this with Cognizant, which recently expanded its share buy-back program from USD 1.5 billion to USD 2 billion (till December 2015). Out of this, Cognizant has already repurchased stock worth USD 1.1 billion, implying repurchase of about USD 1 billion over the balance of 2014 and 2015," it said. "However, there has been no material impact on stock price performance."
Infosys' share prices, however, would be driven by improving business momentum (better revenue and profitability growth), a trend which is underway, according to the firm.
"On top of this, if Infosys were to increase its dividend payout, we believe it would make an irresistible combination," it said.
Infosys stock price
On September 22, 2014, at 14:31 hrs Infosys was quoting at Rs 3659.00, down Rs 42.45, or 1.15 percent. The 52-week high of the share was Rs 3847.20 and the 52-week low was Rs 2894.00.
The company's trailing 12-month (TTM) EPS was at Rs 185.71 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 19.7. The latest book value of the company is Rs 733.03 per share. At current value, the price-to-book value of the company is 4.99.
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