Infosys, the second largest software services exporter, saw shares slide 2 per cent on Friday. The CNX IT and BSE IT sector indices fell 1.4 per cent while the BSE Sensex and NSE Nifty were down 0.7 per cent.
Over the past three months, Infosys shares are down over 16 per cent while BSE Sensex and NSE Nifty shed only 2.3 per cent.
This indicates an underperformance. It is not very common for Infosys to have such a backdrop for the shareholders’ meet. Last year, it was an emotional moment as the company’s founder N R Narayana Murthy stepped down. This year, he may sit in the audience or among all shareholders.
The company’s management should note that the stock market is trying to say something.
Here are some pointers ahead of the meeting:
• Company needs growth triggers: The underperformance of Infosys indicates that the market is not convinced that the company has positive surprises in store for revenue and profit growth going forward. Shareholders are unlikely to remain quiet and could raise concerns in the meeting on Saturday on future growth. The company management would have to come up with convincing answers to these concerns.
• Currency headwinds could hit profits: Volatility in the currency markets could hurt Infosys revenue and profit growth. Brokerages like Motilal Oswal and HSBC already expect the company to tone down expectations for revenue and profit growth for 2012-13. While the company hedges against foreign currency risks, there is volatility across currencies like US dollar, euro, Australian dollar and British pound. If currency pressures remain through the year, there would be more pressure to grow revenue to maintain profit margins over subsequent quarters.
• Calls for buyback of shares intensify: There is intense pressure on the company to utilize the $ 4bn in cash on the balance sheet. Kotak Securities, a Mumbai-based firm, wants the company to utilize excess cash for a buyback of shares. “A sizable cash balance, operating engine churning consistent and strong free cash and an aversion to large acquisitions or large deals present a strong case for Infosys to pursue a consistent share buyback program,” Kotak said in a note.
• How does buyback help: A share buyback programme reduces the equity capital of a company. This improves the earnings per share or EPS as profit is divided between less number of shareholders or shares. Accenture, a large global IT services company, did a buyback programme between 2003 and 2011. According to Kotak Securities, the company’s EPS growth was 16 per cent over this period. “It would have been 9.8 per cent without the buyback,” the firm said in the note.
• Why Infosys needs to listen to markets more than others: Infosys shareholders are spread all over world. Unlike TCS and Wipro, where there is a high promoter holding (of over 70 per cent), Infosys shareholding is widely spread. Promoters control only 16 per cent of the company. Institutional shareholders at the company have called for top management changes. They could also push for returning the excess cash on the balance sheet to shareholders through either a higher dividend payout or a buyback offer. The meeting on Saturday could see shareholders demand such an action.