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Corporate Jan 14, 2013

Not so simple: Infosys may have reason to hoard cash

By Rajesh Pandathil

Prior to the announcement of Infosys' April-June earnings, speculations abounded about what the company is likely to do with its about Rs 22,000 crore cash pile.

Some media reports said it may announce a buyback of shares, others said it will announce an acquisition. There were others which said the company will pay off a better dividend to silence those who criticised its lack of action on this count.

But it was different during pre-results period of July-September and October-December, with such speculation declining sharply.

Why so? Have investors and analysts accepted and resigned to its conservative approach? Or is there anything more to it?

Damodaran believes that complex tax codes are partly responsible for cash accumulation by some of the world's top companies.

The company, which reported Rs 2,369 crore net profit in October-December, has Rs 22,436 crore in cash as of end-December, according to a report in the Economic Times.

According to the report, it is this cash that has fuelled the investor interest in the stock, which rallied 17 percent on Friday, and not the company's better-than-expected October-December performance.

The report has analysed cash-to-market value ratio of Infosys and the bigger rival Tata Consultancy Services.

While for Infosys the ratio is 14.5, for TCS it is between 2.4 and 4. This ratio signals "a gradual decline in the valuation of Infosys's core business," the report says.

Infosys was unable to grow organically and it did not utilise the cash to grow inorganically either, Ankita Somani, IT analyst with Angel Broking, has been quoted as saying in the report.

Another Economic Times report may be offering a reason for investor interest in the stock.

In an interview to the newspaper, Aswath Damodaran, a finance professor at Stern School of Business, has partly attributed the reason for cash accumulation by companies to complex tax codes in a country.

Apple in the US is an example, he says.

"For instance, Apple prefers to sit on a cash of $100 billion and enjoy capital gain on that cash than paying more on a higher dividend tax. Talking about valuing this, I would value this $100 billion as $100 billion," he has been quoted as saying in the report.

According to him, both long-term capital gains and dividend should be taxed at the same level. "If the dividend tax is higher, investors would prefer the company holding the cash and getting capital gains in the long term," Damodaran has been quoted as saying in the report.

End result is that the cash, which otherwise would have been invested in smaller companies that are in need of capital, is held back.

India has a dividend distribution tax, wherein companies are to pay about 16 percent tax on dividend they pay out, while no tax is applicable for the payout in the investors' hand.

Can this be a reason for the decline in investor clamour for Infosys's action on its cash hoard?

by Rajesh Pandathil

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