Share buyback: why are investors forcing tech companies’ hand into distributing cash?

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Published: February 17, 2017 3:00:53 PM

Analysts and investors are positive on the news of the Indian IT companies considering share buybacks, saying that in the absence of any major acquisitions or other investment plans, these firms would do well to reward the shareholders by distributing cash.

chennai floods, Tata Consultancy, Tata Consultancy services, tcs, tcs revenue, tcs q3 revenue, chennai floods tcs, chennai floods tcs q3 revenueTCS, India’s largest IT services company, said yesterday that it will consider a share buyback in its next board meeting scheduled for February 20. (Image: Reuters)

Markets have welcomed the news of the information technology companies considering share buybacks, with the shares of the IT majors TCS, Infosys and Wipro rising sharply over the last two trading sessions.

TCS, India’s largest IT services company, said yesterday that it will consider a share buyback in its next board meeting scheduled for February 20. The company has a cash reserve of $5.7 billion, part of which the shareholders hope will be distributed to them.

Cognizant, the US-based Nasdaq-listed firm, which competes directly with Indian IT firms with several of its delivery centres being run out of India, earlier this month announced a programme to return $3.4 billion of cash to shareholders through dividends and buybacks.

Following Cognizant and TCS, Infosys’ top brass also said yesterday that the company is not averse to a buyback of shares and will decide on a capital allocation policy at the appropriate time. Further news reports suggested that Infosys has already engaged investment bankers including JPMorgan for discussions on capital allocation and share buyback.


Show me the money!

Analysts and investors are positive. Today morning, Aberdeen Asset Management Asia’s MD Hugh Young said that TCS buyback is good news, adding that he is supportive of the buyback announcement.

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Brokerage and research firm HDFC Securities also pushed for the buyback. “With maturity in growth of Indian IT, the imperative to return excess cash to shareholders is high. We believe there is scope to optimise capital allocation, especially the buyback route, with valuations also at historical lows,” HDFC Securities analysts Apurva Prasad and Amit Chandra said in a note.


Cash cushion

Even while the companies might want to hold on to their cash reserves for funding future growth, especially for making any big-ticket acquisitions if such an opportunity comes along, analysts say they still have room to distribute part of the cash to the shareholders.

“In the last five years we haven’t seen TCS doing any major acquisition and I don’t think that’s the way they want to go,” Bhavin Shah of the investment brokerage firm Sameeksha Capital said in an interview to BTVi news channel. “In absence of that, cash could be easily distributed,” he added.


New age technologies

Further, amid concerns that the rapidly changing landscape of the IT industry may require the companies to suddenly boost investments into development of automation and digital technologies, Shah said that Indian companies have not shown any groundbreaking progress in that area. “It’s better to distribute that cash and achieve that aspect of the value creation for the shareholders,” he said.

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Earlier, TCS’ outgoing MD and CEO N Chandrasekaran had said in a TV interview that he would not want the company to fall short of cash in case any opportunity for an acquisition came along. Over the years, TCS has been increasing its dividend payments to shareholders, Chandrasekara had said to CNBC TV18.

 

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