Results primer: Investors want some guidance on how Infosys plans to use $5.4 billion cash reserve

MUMBAI: When Infosys announces its third quarter results on Friday, investors will keenly watch its outlook commentary. But the bigger focus could be on the management’s remarks on how it plans to use its cash pile of over Rs 34,000 crore ($5.4 billion).

While investors have asked the company in the past to use the cash to declare dividends or buyback shares or make an acquisition, the chatter has resurfaced of late after the management, according to Motilal Oswal Financial Services, spoke of the issue recently. “Investors have high hopes from the new Infosys management as they are expecting that CEO Vishal Sikka, unlike his predecessors, will be aggressive about better utilisation of cash reserves. Markets will be happy even with management commentary on tangible plans for utilisation of cash on books,” said Mehraboon Irani, principal & head - private client group business at Nirmal Bang Securities

Infosys shares rose 0.5% on Thursday against the 0.9% advance in the information technology index and 1.4% gains in the Sensex. But the meagre gains in the stock on Thursday do not reflect the bullish bets that select traders have created in the stock ahead of the results, said analysts. “Investors are increasingly getting impatient about Infosys’ lethargic strategy on utilisation of its cash reserve. Market participants are expecting that management may give clarity about utilisation of cash reserve on Friday, which can be in the form of dividend, share buyback, or acquisition,” said Daljeet Singh Kohli, head of research at IndiaNivesh

Infosys’ return on equity (RoE) has continuously eroded over the last 10 years from 43% in 2004-05 to 24.9% in 2013-14, according to Motilal Oswal. It is much lower compared with its rival company TCS’ RoE of 40%.
The issue of Infosys' cash usage was brought up by the company’s former CFO, V Balakrishnan, and HR head, Mohandas Pai, who wrote to the new management led by Vishal Sikka asking it to initiate a share buyback. “The result of continuous accumulation of cash as percentage of the balance sheet, Infosys’ RoE has continuously eroded over the last 10 years. Vishal Sikka has shown intention of buying smaller innovative companies. However, we remain convinced and acquisition intent should in no way deter better dividend payouts,” said Ashish Chopra, analyst at Motilal Oswal.

Infosys will announce results on Friday during market hours for the first time ever. Derivative analysts remain bullish on the stock. “We are suggesting Bull Call Spread strategy for Infosys as technical trend suggests that the stock is all set to move upwards by breaking the current consolidation phase. Traders are advised to buy 2000 call strike and sell 2100 call strike to play the positive to rangebound movement of the stock ahead of its result,” said Chandan Taparia, derivatives analyst at Anand Rathi Securities.

Infosys stock price has risen 17.5% over the last one year and has outperformed the ET Infotech Index, which has gained 14.3%. However, the stock has underperformed the benchmark index, BSE Sensex, which has gained 32% over the same period.