Buyback divide: Why market cheers Infosys but boos PayTM

Infosys and PayTM announced their share buyback plans within weeks of each other, but the investor reaction couldn't have been more extreme.

While Infosys' share price - it reflects the mood of the market - has been on an uptick, PayTM's has nosedived.

So, let's understand why there's such a huge difference in reaction to the buyback news.

PayTM
On December 12, PayTM's parent company announced they would buy back shares at Rs 810 each. The share price at the time of the announcement was Rs 534.

Despite the hefty premium of 50 per cent, its stock price has tumbled over 3 per cent since then, signalling investor unhappiness. This may be due to the following reasons:

• Companies usually repurchase shares when it has a positive cash flow, meaning it has more money than needed to maintain their growth path. However, PayTM's buyback plan causes head-scratching as it has been posting losses (as you can see in the table below). Although the top management has assured they have a "clear path to cash flows", the market remains unconvinced.

• Stakeholders Empowerment Services stated the company's buyback plan would favour pre-IPO investors. While it may be good news for venture capitalists and their employees, it is a tough pill to swallow for the average investor who has seen more than 66 per cent of their money erode since the company got listed in November 2021.


• Crucially, investors are questioning why the company is buying back shares at Rs 810 when, only a year ago, the stock opened for trading at Rs 2,150. From that point of view, they are buying back shares at a discount of 62 per cent.
  Moreover, the size of the buyback is just a little over 1 per cent, which suggests very few investors benefiting from this move.


• Given that the share price has corrected from Rs 2,150 - the stock price on its first day of trading in the market - to Rs 525 currently, investors remain wary of putting their faith in a business struggling to find its niche, its market-dominating segment.
  
  While the management is trying to whip up momentum and move towards profitability, a buyback that favours selected investors and potential misallocation of capital is rubbing investors the wrong way.

Infosys
In the first week of November, Infosys - the second Indian IT firm to cross the $100 billion valuation mark - sounded out their share repurchase plan. The Bengaluru-based industry bellwether said they would buy back shares at Rs 1,850 apiece. At the time, its shares were trading at Rs 1,419.

The investor community heartily welcomed the 30 per cent premium due to the following reasons:

• Infosys' buyback announcement was a shot in the arm for investors, given that the company's share price has been red this year.
  
  Despite a lean year, the IT company has a rich history of rewarding its shareholders, unlike PayTM. For instance, even if you take this year into account, Infosys has helped its investors' wealth grow almost 200 per cent in the last five years.


• Infosys, like a lot of Indian IT firms, are sitting on piles of cash. Through this buyback, Infosys will return the free cash to its shareholders. The benefits of doing this are multifold: they build trust, consolidate their ownership, help stock prices go up and boost its balance sheet.
  
  Unlike PayTM, they are a profit-generating company and can afford to use their free cash to reward its shareholders.

• This would be the company's fourth buyback since it entered the stock market in June 1993. It has a previous track record suggesting it can use its capital to reward its shareholders and parallelly continue on its growth trajectory.

Suggested read: Do share buybacks zoom share prices?