Not long ago, Infosys was the darling of the stock market, a beacon of success in the late 90s and early 2000s technology boom. It was a pioneer in corporate governance, setting new standards by publishing quarterly results before it was a regulatory requirement. The company's management, with their unwavering dedication, created unprecedented shareholder value for early and new investors over the next two decades. The company's stock market performance, a testament to its success, saw an unprecedented momentum in the share price. However, this momentum has slowed in recent years, with the share price remaining unchanged over the past three years.
Over the past few days, the Infosys share price has inched up following the company's announcement of its largest buyback of shares. When a company offers to repurchase its own shares, it indicates that it has surplus cash on its balance sheet. The intention is to return the money to shareholders. It may sound like a noble idea, as selling your shares can yield a premium over the prevailing market price. If you hold them, you receive the benefit of higher earnings per share as the company extinguishes the shares bought back in the offer. Either way, it is a positive move for the share price in the short-term. Despite that, there is barely any jump or enthusiasm among investors.
As a shareholder of Infosys, you may wonder about what lies ahead. That is primarily because today's prices are a function of tomorrow's profits. Infosys is not making losses. However, the expected growth in revenue and profit is no longer as spectacular as it was in the past. Indian technology companies, such as Tata Consultancy Services and Infosys, generate a substantial amount of free cash flow. They invest the money they make in people. They hire smart engineering graduates or train science graduates to become coders, analysts, and consultants. As their business is to service other businesses in the US and other global markets, these companies spend resources in expanding their reach across large Fortune 500 companies.
A section of analysts cites examples of other global rivals, such as Oracle, and criticises Infosys for focusing on shareholder value and not allocating sufficient funds to innovation and research. The return of cash to shareholders is not viewed positively. Such criticism is unfounded and unnecessary. Companies like Infosys have a DNA that enables them to service large corporate customers overseas. Suppose you listen to the conference calls of most companies. In that case, they do not expect a significant surge in the demand for technology services from companies as they grapple with the impact of artificial intelligence and machine learning. Furthermore, business sentiment is hindered by the tariff wars and geopolitical risks worldwide.
The solution suggested by some for Indian companies is to suddenly turn to tech products and compete with Microsoft, Nvidia, and others. That is unlikely to happen. You cannot change the DNA of a business like that suddenly. It is not the fault of the software services companies. India is not an innovation-led economy like the United States. The economic infrastructure in India remains hostile to entrepreneurship, despite the government's claims of reforms. The software services sector has not evolved to address India's structural and economic problems. It evolved because it addressed problems of large clients outside India.
From an investor's standpoint, you may want to assume that it is part of a business cycle. Expecting innovation-led approach from Indian technology companies is like getting them to move away from their natural game. You may want to discuss investing based on valuation and future market expectations. While the growth rates of early 2000s are missing, technology companies continue to generate free cash flows. As an investor, your ability to moderate your expectations will be tested.