|»5 Minute Wrap Up by Equitymaster|
On This Day - 6 AUGUST 2014
Cash is King. But not for Infosys.
In this issue:
However, this time around some minority shareholders who were previously the executives of the company itself have decided to question the policy of piling up cash. In fact, they have also written to the company's board. And have asked it to immediately consider a buyback worth Rs 112 bn (37% of cash pile) to dispose off excess cash.
Management change has been cited as one reason to undergo buyback as it has raised concerns amongst many stakeholders. Till recently, Infosys' cash hoard policy, was not as valuation dilutive as it should have been. The reason was strong management faith. There was a belief that though excess cash was earning meagre returns it was not at the risk of being consummated to reckless activities.
However, an abrupt change in management, with key people leaving and the company having an outside CEO, stakeholder faith may have diluted. Hence, management should indulge in buy back to restore confidence in the company.
Now we certainly agree that if a company is unable to deploy its excess cash profitably it should consider returning the same to shareholders. Cash sitting on balance sheet could earn 8%. But the same if returned to shareholders can fetch higher returns.
However, what slightly amuses us is the demand coming from ex-employees. These are the same people who during their respective stints ignored shareholder demands of returning excess cash themselves. Apart from this, these employees have also accused the company of wealth destruction for hoarding cash.
A demand to return cash now indirectly indicates that the prior management was more financially disciplined. And the current one is yet to build that kind of faith. Hence, needs a makeover via buy backs. However, a comparison between the two managements is too early we believe. And let's keep it aside for the time being.
The bottomline is that Infosys should seriously consider returning excess cash to shareholders. It has made no meaningful acquisitions in the past. And thus high cash is dragging its return ratios. This further strengthens the case of returning the hoarded money. Perhaps, its high time for the management to consider this issue more seriously. Else the valuation discount with its large cap peers like TCS may widen further.
Do you believe cash rich companies like Infosys should return excess money to shareholders? Or should they instead pile more cash to acquire companies in future and grow inorganically? Let us know in the Equitymaster Club or share your comments below.
This also suggests that one can see a spurt in overseas borrowings as economic sentiments improve further and companies in India plan capacity expansion. While this may support capex plans of the firms, such firms will become highly vulnerable to forex risks. As we have experienced in the past, forex rates can be volatile enough to negate effect of the low interest rates on the ECBs. One must note that earlier in 2008, cheap foreign borrowings lured a lot of companies to expose themselves to foreign debt. However, as the economy slowed down and market sentiments turned negative, paying back the bonds became a tough task. Such debt resulted in stretched balance sheet subjecting India Inc.'s creditworthiness to risk. In some cases, shareholders in such firms burnt their fingers. Hence, as the trend gains momentum again, we believe investors must keep a close watch on such firms and ensure the company's ability to hedge and deal with such risks, in case they materialize in future.
Now well, our point was not to suggest that you join politics. But to draw your attention to a dichotomy in our country. On the one hand, we have ordinary citizens paying through their nose and struggling to make ends meet. And here we have parliamentarians who get food at abysmally low costs. So much so that the deficit has to be financed from the budget allocation for Lok Sabha and Rajya Sabha secretariats. So you not only pay a bomb for your food supplies, but you also indirectly, through your taxes, pay to feed our not-so-underprivileged MPs. What worries us most is that the people who run the country have no clue of the misery of the people.
So, with there being a strong possibility of rates rising in 2015, a 20% gains in gold could be yours for the taking if history is anything to go by. But whether rate hike or not, we do believe that every portfolio should have small exposure to gold. For it acts as a hedge should there be some sort of crisis in the world. Thus, if you haven't bought gold already, this could be a good time to buy it. Besides, there's a chance you could also benefit from the appreciation that precedes an interest rate hike by the US Fed.
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