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The ₹18,000 crore share buyback plan announced by Infosys has given the stock short-term support. But the big question is, does it really address the core valuation challenges for Infosys Ltd?
In the last few quarters, Infosys was up against some real business challenges. In the current calendar year, the stock has lost more than 20% after the tariffs put the company in a spot. It is not like the tariffs directly impact the company. But the tariffs have brought in uncertainty in the markets and that has impacted the tech spending plans of corporates. Global companies are either trying to put off the investment commitments or they want to get some real price bargains from the IT vendors. That has put pressure on the top line growth and OPMs of Infosys Ltd.
Currently, Infosys trades at about 22X historic rolling earnings, and in forward P/E terms it is about 20X. Even TCS is trading at around the same valuations, while Wipro trades at under 20X P/E. The median P/E of the Nifty-50 stands at 33X, so the P/E ratio of IT companies on an average is much lower. In fact, if you look at the Nifty-50 universe overall, the two sectors (other than PSUs), that are trading much below median P/E, are the IT sector and the banking sector. In the case of banking, it is a case of NIM concerns as well as concerns over the asset quality in the light of global issues. However, in the case of IT, the concerns are more about the lack of a strong and viable narrative that can drive growth.
Major Indian IT companies have sunk billions of dollars from their huge cash reserves to buyback shares. However, it has hardly benefited the valuations of the IT companies. On the contrary, the IT sector valuations have only got cheaper. That, in a nutshell, is the downside risk of valuation. A generous buyback is like a tacit admission by the company that they do not have enough credible ways to invest and boost future sales growth. Ideally, Indian IT companies should be looking to use their big cash reserves to trigger organic and inorganic growth. It will be a more credible way to push up the valuations. Price is not the issue!
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