Infosys generosity falls short of what investors need

Two takeaways from Infosys Ltd’s earnings announcement on Thursday are worthy of note. First, slower growth is here to stay. And second, Infosys has buckets of cash it needs to get rid of.
After average annual revenue growth of 17.6% over the past decade, the Indian outsourcing leader grew its top line just 9.7% last year in rupee terms, and 7.4% in US dollar terms. That’s forecast to drop to between 2.5% and 4.5% in rupees, or 6.1% to 8.1% in greenbacks, next fiscal year.
Whichever currency you look at—62% of Infosys’s revenue comes from North America—the outlook is less than analyst estimates compiled by Bloomberg. Two straight years of single-digit growth, and the third in four years, make it clear the heady days are over. Fellow Gadfly Andy Mukherjee has outlined reasons for this, including the industry’s inability to embrace social, mobile, analytics and cloud technologies.
If you take it as a given that Infosys is no longer a growth company, then shareholders need another reason to hold the stock.
Management acknowledged as much in its earnings statement by pledging to return Rs13,000 crore ($2 billion) to shareholders through dividends and buybacks. Its policy now is to give back up to 70% of free cash flow.
That’s not enough.
Returning $2 billion is roughly double what Infosys paid last year. It’s also equal to about 34% of current cash, chief financial officer M.D. Ranganath said.
Yet, while 70% of free cash flow seems generous, it’s actually in line with what Infosys paid out the prior year and doesn’t speak to the big pile of money the company is already sitting on.
Infosys is an asset-light company with minimal capital expenditure. According to Ranganath, it has close to $6 billion in the coffers. Yet it’s been so stingy over the past decade that it’s accumulated more than Rs65,000 crore in retained earnings, equal to 4.5 times last year’s net income.
Infosys may not be a growth stock any more, but the
tech titan needs to be a lot more generous if it’s to be
considered a dividend play.

— Bloomberg

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously
covered technology for Bloomberg News