Strike while hot: use your cash Infosys

Infosys was a major market gainer today after a US court dismissed harassment charges filed by a US employee, providing a win for the company in its biggest market.

Infosys shares rose as much as 3.7 percent to a six-week high, and crossed the Rs 2,400 market for this first time since the company announced its quarterly results on 12 July.

Former employee Jay Palmer accused Infosys of illegally using low-paid foreign workers on US projects instead of hiring US workers at market wages. But the judge threw out the case, saying that no state laws were broken. Infosys too denied wrongdoing and investors cheered the judgement.

Prior to the judgement today, Infosys stock had lost 22 percent this year against a nine percent rise in the Sensex. This is because domestically Infosys has been under pressure by investors to both grow its market share and increase its margins. That has meant intense pressure to keep costs low.

With investors in a good mood, the time is ripe for Infosys to set things right, at least where growth is concerned and regain investor confidence in the company. And the best way of doing this is inorganic growth. The Bangalore-based IT firm is sitting on a cash pile of Rs 20,000 crore but has not provided any guidance or indication on how they would be utilising the money.

Moreover, Infosys does not have a track record of making large acquisitions and that makes the Street wary of the company’s need for large amounts of cash for acquisitions. Clearly the company is under pressure to find a strategic target at a time when economic growth is slow in the developed countries. But here too the cash should be used wisely and efficiently. While finding the right fit for its global expansion is imperative, the company must stay away from acquisitions that do not fit its strategic intent since mere bargain deals would drag the company’s performance in the long run.

Also, even if it is sitting on such a massive cash pile, the company has not handed back some of it to its shareholders this quarter through buybacks. At best shareholders get higher dividends along with a special dividend of Rs 10/share on account of the 10th year of operations of the Infosys BPO.

Investors have already begun to question the company’s growth strategy. That’s because Infosys has often cited weak macroeconomic environment and falling client confidence as the reasons behind its falling fortunes. However, other companies like TCS and HCL, India’s number four software services exporter, seem to thrive in the same environment.

Is it wise for Infosys to not change its strategy of seeking high-margins and conservatism in its acquisitions strategy despite the sea change in the operating environment?

Infosys is a pioneer brand and has lots of cash but what it desperately needs is a distinguishing feature in a competitive market before investors start losing patience.