Edelweiss' research report on Infosys

Infosys has informed stock exchanges that its Board of Directors (BOD) will consider proposal to buy back shares at the upcoming Board meeting to be held on August 19, 2017. This has put to rest speculations on the timeline of the buyback. While the quantum and price of buyback is yet to be finalised, management’s earlier figure of INR130bn (including dividend) hints at a much bigger buyback in the offing compared to those done by peers, TCS, HCL Tech and Wipro. For Infosys, the buyback will lead to higher RoE and payout ratio. We do not perceive this move to be an outcome of lower growth, instead it well means limited possibilities of large acquisitions going ahead, and consistent generation of cash. We maintain ‘BUY’ with a target price of INR1,155.

Outlook

With domestic IT companies shifting focus to small skill‐based rather than large acquisitions, the need to maintain huge cash pile is waning. This implies higher distribution, either in the form of buybacks or increase in dividend payout. Reduction in cash will lead to higher RoCE, which will entail sector rerating. Moreover, Infosys’ guidance of 6.5‐8.5% in spite of multiple headwinds like technology transition (weakness in legacy business), project cancellations and automaton‐led realisation dips highlights the company’s strong fundamentals and client relationships. At CMP, the stock is trading at 14.8x and 13.5x FY18E and FY19E EPS, respectively. We maintain ‘BUY/SO’ with target price of INR1,155 (16x FY19E EPS).

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