Software major Infosys considering a $2.5 billion share buyback plan this April may have brought cheers to its shareholders, but the move could spell a challenge for the company CEO Vishal Sikka who has set a target of achieving $20 billion revenue by 2020.
Analysts fear the robust buyback proposal could shrink the company's overall cash position, which could have come handy in undertaking inorganic growth path in the wake of challenging global business environment and changes in the overall technological space.
As of 31 December 2016, Infosys had $4.5 billion in cash and investments on its books, which largely remained unutilised over past few years.
In fact, in a high intense fight between Infosys co-founders and board held last month, some key founding members had criticised, among other things, about the company's poor capital allocation policy.
With the TCS board clearing the proposal to buy back shares worth Rs 16,000 crore, reports say Infosys may also follow suit.
Over 65 percent of the company's revenue target of $20 billion was expected to come from organic growth and the rest through acquisitions.
However, according to a report in The Hindu BusinessLine, if the company exercises its entire option to buyback shares worth $2.5 billion, the move will bring down the cash position considerably and hit the prospects of any big acquisition.
"A material change in the capital allocation policy is unlikely to happen as long as the tall 2020 goals remain. The board and the management would prefer holding on to capital to drive growth," The Hindu BusinessLine report said citing Nirmal Bang report.
Also, any decision to acquire a Nasdaq-listed company could come at a huge cost, as most of them come at a valuation of around five times the market cap.
Although, the company in past followed inorganic growth path through acquisitions of Panaya, Skava and Noah Consulting, the current challenges and headwinds besides disruption in basic business model would mean steep acquisition price tags going ahead.
According to this article published in Firspost last month, it makes more sense for Infosys to make a strategic choice towards innovation-led growth in an emerging future than save some pennies to boost the short-term earning per share. Because long-term opportunities beckon Infosys.
As it is the Nasdaq-listed Cognizant has been expanding at a faster clip, at times threatening to dislodge the top Indian software companies in the pecking order through its aggressive strategies.
"Cognizant will probably end up with $18.5 billion in revenue, while Infosys will get to $13-$14 billion without acquisitions," said The BusinessLine report.
Hence, if Infosys wants to achieve the target, the company needs to look for big acquisitions. However, the proposed buyback exercise could take away the sheen and the company may lose ground to fast expanding Cognizant.
Updated Date: Mar 02, 2017 17:36 PM