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Dividend Payout Analysis in IT industry

(Infosys)

INSTITUTE OF MANAGEMENT TECHNOLOGY

Submitted By:
Vivek Kumar Bhagat
Adity Tehri
Kumar Pulkesin
Amit Nayyar
Table of Contents
INDUSTRY ANALYSIS .............................................................................................................................. 3
Trend of dividend payout in IT industry for last 5 years ................................................................. 3
Dividend Payout Policy of Infosys Limited (How Much to Pay?) ............................................................ 4
Infosys Limited .................................................................................................................................... 4
Capital History ..................................................................................................................................... 5
Shareholding Pattern .......................................................................................................................... 5
Financials............................................................................................................................................. 6
Dividend History of Infosys ..................................................................................................................... 6
Comparison with Selected Manufacturing Firms (Leyland and Tata Motors) ........................................ 9
Dividend Payout and Market capitalization.......................................................................................... 10
Dividend Growth (Way Forward) .......................................................................................................... 11
INDUSTRY ANALYSIS
In Industry analysis, Information technology industry is studied in terms of its problems
and prospects. India is considered as world’s leading sourcing destination for the
information technology industry, as ion figures it comes to just about 67 percent of the US $
124-130 billion market. The IT industry has shaped momentous command in education
sector, in particular for engineering and computer sciences.

Information Technology is fragmented industry and not a concentrated one. In fragmented


industries, there is absence of big dominant players such that small companies also prevail in
the market but it is difficult for one company to establish a vigorous operation. Information
technology industry is a fragmented industry, which emphasis on free entry and exit of
firms into the sector. Even though such a situation prevails in the market, the major role is
played by the big giant corporate like IBM, Infosys, TCS, Inforte, Wipro and others.

Government can make their interference into the technology sector which has its own
effect in the industry. Government interference and intervention can be explained in two
fundamental parts i.e. directly and indirectly. Direct method means support given by the
government for the development of new technology and market mechanisms to present
incentives for change done by the industry. On the other hand, indirect approach deal with
the persuasion to regulate project standards and direct government purchases by the IT
sector.

Trend of dividend payout in IT industry for last 5 years


The DPR measures what a company‘s pay out to investors in the form of dividends. It can
be calculated by dividing the annual dividends per share by the Earnings per share. It can
be computed by DPS divided by EPS.

Table 1: Table showing Dividend payout ratio

YEAR WIPRO INFOSYS TCS HCL TECH MINDTREE


2011-2012 31.48 31.86 47 8.4 7.4
2012-2013 30.52 26.45 30.9 11.4 14.66
2013-2014 26.71 35.49 32.7 10.3 23.07
2014-2015 36.17 42.01 77.9 10.8 26.65
2015-2016 18.3 35.28 21.8 57.6 29.12
CAGR −10.28 2.06 −14.2 46.97 31.5
Table 1 shows dividend payout ratio for last five years, in that Infosys, HCL Tech and
Mindtree is providing shareholders with high dividend whereas Wipro and TCS declined in
their dividend payout ratio.

Dividend Payout Policy of Infosys Limited (How Much to Pay?)


The Information Technology (IT) industry has been India’s sunshine sector for quite some
time now. The industry has contributed considerably to changing India’s image from a slow
developing economy to a global player in providing excellent technological solutions.
According to the IBEF (India Brand Equity Foundation) figures, the Indian IT industry is
set to touch $225 billion by 2020. The services sector needs huge quantum of knowledge
workers. According to industry experts, India large labor force has been stubborn in
transition and lack adequate training. Additionally, NASSCOM submits that Indian IT
workforce will touch 30 million by 2020, becoming the highest sector employer.
There is a broad consensus that the global center of economic growth is moving to Asia.
Indian economy experienced a major economic crisis in 1991, but soon after that because
of bold reform measures, India’s economy has experienced a rapid economic growth rate,
more foreign investment, and a boom in the IT sector. IT companies are different from
that of traditional manufacturing firms. It has almost no investments in tangible fixed assets
and its revenues are generated by providing computer-based solutions. Because of very low
fixed assets, it was tough to attract investors for these firms, share pricing was very difficult
and its dividend model differs from that of traditional Indian companies. This case study
delves deeper into how Infosys Limited evolved as a market leader in IT industry.

Infosys Limited
Infosys limited is the second largest software exporter of India with net operating revenue
of`62,441 crores and net profit of `13,681 crores for FY2016. It is listed on the National
Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India and the New York
Stock Exchange (NYSE), Euronext London and Euronext Paris markets. On FY2016
closing, it had market capitalization of `279,796 crores and employed over 200,000 by
March 2017. Infosys has 85 sales offices around the world as on March 31, 2016, of which
only 3 are in India. Its major revenue earning centers are America and Europe.
The Infosys limited, co-founded by seven engineers; N. R. Narayana Murthy, Nandan Nilekani,
N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora in 1981 as
“Infosys Consultants Pvt. Ltd.” with a capital of `10,000 ($250) in Model Colony, Pune as the
registered office. In over a 35-year span, the company transformed itself into an industry leader.
The Infosys signed its first client, Data Basics Corporation, in New York City. The company’s
corporate headquarters was relocated from Pune to Bengaluru in 1983. In 1987, the company
opened its first international office in Boston, US. During fiscal 2012, company changed its
name from Infosys Technologies Limited to Infosys Limited to mark the transition from being a
technology services provider to a business transformation partner.
Management also changed hands over the period. In 2002, Nandan Nilekani took over as
CEO from Narayana Murthy, who was appointed Chairman and Chief Mentor.
K. Gopalakrishnan became CEO in 2007 and in 2011, Shibulal succeeded him and, during the same
year, Murthy also handed over chairmanship to K.V.Kamath. Currently Dr. Vishal Sikka is serving
as the CEO and MD of the company and N. R. Narayana Murthy as the Executive Chairman of
the Board.

Capital History
The Infosys went public in 1993 with an offer price of `95 per share against book value of
`20. The Infosys Initial Public Offer (IPO) was under-subscribed but Morgan Stanley “bailed out”
by picking up 13% of equity at the offer price. The Infosys shares were listed in stock
exchanges in June 1993 with opening price at `145. The company further issued 550,000
shares in 1994 to institutional and corporate investors at `450 (face value of `10). Later, in
March 1999, it issued 2,070,000 American Depository Shares (ADS) (equivalent to 1,035,000
equity shares of par value of `10 at $34) and got listed on NASDAQ. Subsequent American
Depository Receipts (ADR) issues were made in 2003, 2005 and 2006. In 2012, Infosys
transferred the listing of its ADS from the NASDAQ to the NYSE, Euronext London and
Euronext Paris markets.

Shareholding Pattern
Shares of the company are widely held and traded. As on March 2016, the Promoters’ holding was
just 12.75% and the majority of the shares were held by institutional investors (40.10%), retail
(30.37%) and foreign investors as custodians (16.78%). Promoters’ holding shrank mainly due to
expansion of equity base through overseas listing and Employees Stock Option Plans (ESOP).

Exhibit I: Promoters’ shareholding of Infosys Limited


Source: Company Annual Reports

Exhibit I shows declining trend in promoters shareholdings from FY2001 to FY2016. Infosys with
huge cash on its balance sheet and low promoters’ shareholdings may be a case of potential
acquisition. Large idle cash also reduces the enterprise value of the firm and has adverse impact over
Return on Equity (ROE). Though Infosys defends such questions by saying that the cash is needed
for precautionary measures and future acquisitions, but in reality, Infosys has gone for only small
acquisitions in past equivalent to only a small fraction of cash lying on its balance sheet.

Financials
Infosys reported increasing revenue and profits year after year. The net revenue grew from
`1,900 crores in FY2001 to `62,441 crores in FY2016, registering a CAGR of 26%. During the
same period, the PAT increased from `628 crores to `13,681 crores with impressive CAGR of 23%.
For the FY2015, Infosys reported net revenue of `53,319 crores and PAT of `12,373 crores. The
Balance Sheet size of the firm as on FY2016 closing was `75,141 crores. Infosys remained ZERO
debt firm and shareholders’ funds constituted more than 77% of the balance sheet. Cash and cash
equivalents constituted over 43% of the total assets. The company generated
`9,399 crores from operating activities and after meeting investing and financing expenses, it
added `1,454 crores to cash balance. The summarized Profit and Loss account and Balance
Sheet Statement for last three financial years are given in Annexure I and II respectively.

Dividend History of Infosys


The Infosys has been a regular dividend payer with a mix of cash dividend, stock dividend
(bonus share) and stock split. Infosys pays dividend twice a year. Historically, an interim dividend is
declared by the board in October along with the declaration of second quarter results and a final
dividend is recommended by the Board in April along with the declaration of annual results.
The final dividend is subject to the approval of shareholders at the Annual General Meeting
(AGM). Exhibit II shows the dividend history of Infosys limited since 2001 fiscal.

Exhibit II: Dividend History of Infosys

Date Type Rate (%) Remarks

13-04-17 Final 295

16-09-16 Interim 220

15-04-16 Final 285

15-09-15 Interim 200

24-04-15 Final 590

28-08-14 Interim 600

15-04-14 Final 860

26-09-13 Interim 400

12-04-13 Final 540

24-09-12 Interim 300

13-04-12 Final 640 Includes Special dividend of 200% - BPO operations completing
10 years

22-09-11 Interim 300

15-04-11 Final 400

29-09-10 Interim 800 Includes Special dividend of 600% - 30th Anniversary

13-04-10 Final 300

22-09-09 Interim 200

15-04-09 Final 270

25-09-08 Interim 200

15-04-08 Final 545 Includes Special dividend of 400% - Profit crossing $1 Bn

26-09-07 Interim 120

13-04-07 Final 130

28-09-06 Interim 100

14-04-06 Final 770 Includes Special dividend of 600% - Silver Jubilee

23-09-05 Interim 130

14-04-05 Final 130

01-10-04 Interim 100

13-04-04 Final 2300 Includes Special dividend of 2000% - Revenue crossing $1 Bn

17-09-03 Interim 290

10-04-03 Final 290

30-09-02 Interim 250


10-04-02 Final 250

05-10-01 Interim 150

11-04-01 Final 150

10-10-00 Interim 50

26-04-00 Final 60

Source: Company Annual Reports

In addition to cash dividend, the company issued bonus share by capitalization of reserves and
surplus. The company also split each equity share of the face value `10 in to two equity shares of
the face value `5 each in FY2000. Exhibit III shows details of bonus issues and stock split since
incorporation.

Exhibit III: Bonus Issues and Stock Split of Infosys Limited

Year Bonus Split

FY86 1:1

FY89 1:1

FY91 1:1

FY92 1:1

FY94 1:1

FY97 1:1

FY99 1:1

FY2000 2 for 1

FY05 3:1

FY07 1:1

FY15 1:1

FY16 1:1

Source: Company Annual Reports

Bonus and stock split have minimal impact on the financials of any company. Both just increase the
number of equity shares and subsequently the higher liquidity in the stock market. As share price
comes down proportionally, these actions help in keeping share price within physiological level for
small shareholders who form a major chuck of shareholding and are more active in share trading.
Infosys follows fixed payout as dividend to its shareholder. Earlier, it was up to 20% which was
increased to 30% in 2008 board meeting and then to 40%. In 2015 board meeting, it was
further raised up to 50% of the PAT. The dividend payouts increased in line with profits in
accordance with the dividend payout policy. Exhibit IV shows dividend parameters for Infosys
from FY2001 to FY2016.
Exhibit IV: Dividend Payout Parameters of Infosys Limited

Financial PAT Dividend Dividend Dividend DPS Dividend


Year (`Cr.) (`Cr.) Payout Rate (%) Yield (%)
FY01 629 42 6.7% 200 6.38
FY02 808 109 13.5% 400 16.52 13.0%
FY03 955 165 17.3% 540 24.98 21.4%
FY04 1,244 217 17.4% 2590 32.52 25.8%
FY05 1,889 1,021 54.0% 230 37.74 24.5%
FY06 2,479 402 16.2% 900 14.59 5.2%
FY07 3,866 1,532 39.6% 230 26.82 7.2%
FY08 4,659 835 17.9% 665 14.60 2.9%
FY09 5,988 2,494 41.6% 470 43.54 12.2%
FY10 6,266 1,574 25.1% 500 27.43 8.3%
FY11 6,835 3,680 53.8% 1200 64.09 9.8%
FY12 8,332 2,339 28.1% 940 40.73 5.0%
FY13 9,429 3,136 33.3% 840 54.61 7.6%
FY14 10,656 3,144 29.5% 1260 54.75 7.6%
FY15 12,373 4,935 39.9% 1190 42.97 5.2%
FY16 13,681 6,841 50.0% 485 29.78 2.7%
Compiled by the authors

The Infosys went public in FY1993 with an offer price of `95 per share. Each share allotted in the
maiden IPO in 1993 at issue price of `95, adjusted for bonuses and split and multiplied to 512
shares by 31st March 2016, at the market share price of `1,217.95 translates to `623,590. The
company surely generated value for the investors by generating huge capital appreciation besides
paying regular dividends. The market value of Infosys equity share has increased many fold.
Unadjusted quarterly closing share price on the BSE is given in Annexure III.

Comparison with Selected Manufacturing Firms (Leyland and Tata


Motors)
For analysis purpose, the case study refers to FY2016 data of Ashok Leyland and Tata Motors.
Profit margin of Infosys (22%) was much higher compared to that of Ashok Leyland (4%) and Tata
Motors (1%). Infosys was a zero debt company whereas Ashok Leyland and Tata Motors had
borrowed funds amounting to 138% and 127% of total liabilities. Cash and cash equivalents were also
very low for selected manufacturing firms. Dividend payout indicators were also very low for
manufacturing firms compared to that of Infosys.
Detailed analyses are shown in Exhibit V.
Dividend Payout and Market capitalization

Exhibit V: Comparative Analysis: Indicators for FY2016

Particulars Infosys Ashok Leyland Tata Motors

Promoters’ Stake (%) 12.75 33.01 50.38

No. of Equity Shares (` crores) 230 285 289

Total Revenue (` crores) 65,924 20,849 48,868

Net Sales (` crores) 62,441 20,313 46,608

Net Cash From Operations 9,863 1,676 2,346

PAT (` crores) 13,681 722 234

Profit Margin (%) 22% 4% 1%

EPS (`) 60 3 1

Share Capital (` crores) 1,148 285 679

Shareholders’ Funds (` crores) 57,830 5,514 22,368

Borrowed Funds (` crores) 0 18501 73120

Borrowed Fund (% of TL) 0% 138% 127%

Total Assets (` crores) 75,803 13,447 57,374

Cash and Cash Equivalents (` crores) 32,697 1,538 212

Cash (% of TA) 43% 11% 0%

Current Assets (` crores) 52,042 5,299 11,304

Current assets (% of TA) 69% 39% 20%

Current ratio 2.94 0.95 0.61

Market Capitalization (` crores) 279,756 30,892 111,533

P/B value 4.89 6.88 5.01

Share Price (`) 1,218 109 386

Share Face Value (`) 5 1 2

Total Dividend (` crores) 6,841 153.63 2.85

Dividend payout Ratio 50% 21% 1%

Dividend Rate (%) 485 95 0

Compiled by the authors

Link with Traditional Dividend Theories


This section of the case study tries to establish link between existing dividend theories with
dividend policy of Infosys. It also discusses about the need to draft different dividend policy for
companies like Infosys. Analysis shows that the percentage shareholding for family has gradually
reduced over the period from 29.15% in FY2001 to 12.75% in FY2016. However, in case of
Infosys, owner-manager agency problem is absent; owners themselves are the board members
and influencing the payout decision.
Institutional investors push managers to distribute free cash as dividends to reduce agency cost.
The entrenchment theory and information asymmetry suggest negative relation between
family ownership concentration and dividend change. As foreign institutional investors are
subject to higher degree of information asymmetry, higher dividend payments are preferred
compared to retained earnings. Similarly, widely held firms (higher retail concentration) are
more motivated to use dividend payments to signal higher profitability in future. Dividend
payouts of Infosys supports these arguments.
For Infosys, the PAT increased from `629 crores to `13,681 crores with a CAGR of 23% from
the period FY2001 to FY2016 and during the same period dividend payments increased from
`42 crores to `6,841 crores with impressive CAGR of 40%. Dividend payout ratio increased
from mere 7% in FY2001 to about 50% in FY2016. These facts support free cash flow and
signaling hypothesis of dividend payouts. The signaling hypothesis predicts a positive relation
between dividend increase and profitability. Dividend payouts reduce the free cash available and
thus, restricting the firm from overinvestment problem. The free cash-flow theory predicts
positive relation between dividend payout with free cash flow, profitability and negative relation
between dividend and investment opportunities. We find similar case with dividend payout of
Infosys. Its profitability and free cash flows have increased over period.
Large and mature firms tend to have high free cash flows but limited growth opportunities and
retained earnings get accumulated over the period. Life-cycle theory predicts positive relation
between dividend payouts with firm size, firm age, profitability, and retained earnings. Infosys
has huge cash balance on its balance sheet and increasing dividend payout ratio over the period
supports the life-cycle theory.

Dividend Growth (Way Forward)


Infosys, a zero-debt company, has large cash and cash equivalents in its balance sheet. Infosys
with huge cash on its balance sheet and low promoters’ shareholdings may be a case of potential
acquisition. However, in reality, Infosys has gone for only small acquisitions in past amounting
to only a small fraction of cash lying on its balance sheet.
With a dividend payout policy of up to 50%, Infosys kept on adding cash year after year. In
addition, for many years, analysts and investors had demanded excess cash return by dividend or
buyback of shares. In 2014, two former board members of Infosys, TV Mohandas Pai and V
Balakrishnan had sought a buyback of `11,000 crores to enhance the shareholders’ value. In
2015, Cognizant announced distribution by way of dividend and share buyback amounting to
$5 billion in next 2-3 years. Soon after, Wipro bought back 4 crore shares at `625 per share for a
total value of `2,500 crores in May 2016 year and same year TCS announced its share buyback
program of up to 5.61 crore shares at `2,850 per share, aggregating `16,000 crores. Because of
buyback program of peer IT companies, Infosys was also under pressure from investors.
Though change in dividend payouts by increasing payments of profit or by way of special
dividends may not be on priority but company will have to soon take a call on share buyback
decision as peers have already announced the same.
Annexure I: Profit and Loss (Consolidated) of Infosys

All in ` Cr.

PARTICULARS FY16 FY15 FY14

REVENUE

Operating Income 62,441 53,319 50,133

Other Income 3,128 3,430 2,664

Total Revenue 65,569 56,749 52,797

EXPENSES

Operating and Direct Expenses 5,584 3,636 3,437

Employee Benefit 34,418 29,802 28,831

Depreciation and Amortizations 1,266 1,017 1,317

Other Expenses 5,319 5,010 4,484

Total Expenses 46,587 39,465 38,069

Profit Before Tax 18,982 17,284 14,728

Tax Provision 5,301 4,911 4,072

Profit After Tax 13,681 12,373 10,656

Equity Dividend 5,542 5,090 3,605

Dividend Tax 1,134 1,034 615

Source: Company Annual Reports

Annexure II: Balance Sheet (Consolidated) of Infosys as on 31st March

All in ` Cr.

PARTICULARS FY16 FY15 FY14

EQUITIES AND LIABILITIES

Share Capital 1,144 572 286

Reserves and Surplus 56,682 50,164 44,244

Shareholders’ Funds 57,826 50,736 44,530

Non-Current Liabilities 126 50 405

Current Liabilities

Trade Payables 386 140 173

Other Current Liabilities 7,601 6,920 5,449

Short Term Provisions 9,202 8,443 6,409

Total Current Liabilities 17,189 15,503 12,031

Total Liabilities 75,141 66,289 56,966


ASSETS

Tangible Assets 8,637 7,685 6,056

Intangible Assets 4,543 3,661 2,322

Capital Work-In-Progress 960 776 961

Non-Current Investments 1,817 1,398 1,307

Deferred Tax Assets 533 536 629

Long Term Loans And Advances 6,832 4,906 2,560

Other Non-Current Assets 66 85 53

Total Non-Current Assets 23,388 19,047 13,888

Current Investments 75 872 3,024

Trade Receivables 11,330 9,713 8,351

Cash And Cash Equivalents 32,697 30,367 25,950

Short Term Loans And Advances 7,651 6,290 5,753

Total Current Assets 51,753 47,242 43,078

Total Assets 75,141 66,289 56,966

Source: Company Annual Reports

Annexure III: Share Price of Infosys on BSE (Adjusted for Stock Splits)

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