 "Infy's cash was burning a hole in its pocket - and valuations; hence the higher payout")
Many things can be gleaned from Infosys Technologies 2013-14 results and forward guidance, but the most significant one among them is the decision to increase the dividend payout ratio from 30 percent to 40 percent of post-tax profits.
What this signals is that the company’s cash is burning a hole in its pockets, leaving investors glummer than those of its rivals, especially Tata Consultancy Services.
With cash or cash equivalents of Rs 30,251 crore ($5 billion as on 31 March 2014), and with no worthwhile acquisitions in the pipeline, Infosys faced the prospect of a sharp fall in its return on shareholder funds. This is one reason why its price-earnings (P/E) multiples have always lagged TCS’s.
From an investor’s point of view, when the company’s main business earns an operating margin of around 24 percent, investing the extra cash in bank deposits, government bonds and certificates of deposit is a loser - earning not more than 8.5-9.5 percent annually. This level of returns can easily be achieved by the shareholder on his/her own, and does not need an Infy treasury official to do it for him/her.
The higher payout ratio will enable the company to improve its returns on net worth and close the valuation gap with TCS. Currently, Infosys’s standalone price-earnings multiple - at around 20 - is 20 percent below that of TCS. Raising the payout ratio will help close the gap.
After the annual results, which show earnings of Rs 186.35 per share, the P/E multiple of Infosys falls further to 17.64. This is not quite a blue-chip valuation. Infosys is pushing up cash payments to correct this.
Infy’s CFO Rajiv Bansal said as much: “Our cash and cash equivalents crossed Rs 30,000 crore during the quarter. We have increased the dividend payout ratio to up to 40 percent of post-tax profits effective FY 14 to enhance returns for our shareholders.”
Raising the payout ratio also signals that the company is not looking at major acquisitions in the near future. This does not rule out acquisitions, but is an acknowledgement by management that it is holding too much cash that is earning low returns when investors could presumably make better use of this money.
The other significant points in the Infosys story relates to its 2013-14 performance, and its guidance for next year.
The company has announced revenue growth of 11.5 percent in US dollar terms and 24.2 percent in rupee terms. This means a large chunk of its improved profits came from currency changes, and not inherent growth.
On the other hand, its forward guidance sees 7-9 percent growth in dollar terms and 5.6-7.6 percent in rupee terms. What this implies is that in 2014-15 it sees the rupee appreciating, and this could cost it some robustness in the rupee bottomline.
However, neither the payout ratio increase nor the guidance can erase the fact that the company saw a fall in its fourth-quarter performance. In March, company officials had issued a profit warning, and this has come true.
Since March, the share has fallen by Rs 500 from a high of over Rs 3,840 to Rs Rs 3,300 today (15 April). The shareholder needed some consolation prize and she has got it in the payout ratio announcement.
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