Tata Consultancy Services or TCS, India’s biggest outsourcer, today announced that its board will meet on February 20 to discuss a share buyback. Big Indian IT companies have huge cash piles on their balance sheets. TCS, for example, has over Rs. 43,000 crore on its books. “The Board of Directors will consider a proposal for buyback of equity shares of the company at its meeting to be held on February 20, 2017,” TCS said in a statement to the Bombay Stock Exchange (BSE) today. As growth rates come down and share prices suffer, many analysts have said that IT companies should use the cash pile to buy back shares, which will help prop up their share prices.
A share buyback program is a way to return money to shareholders. The company buys back its own shares from the market, usually because the management thinks the shares are undervalued.
“Nearly all IT companies are sitting on excess capital that is diluting return ratios and has corresponding impact on valuations. A sizable cash balance and an operating engine churning consistent and strong free cash present a strong case for Tier-1 ITs to pursue a consistent share buyback program,” Kotak Institutional Equities said in a recent note.
The announcement from TCS comes in the wake of rival Cognizant’s board earlier this month approving a plan to return $3.4 billion to shareholders over the next two years through a combination of share repurchases and dividends.
Infosys, which also has over Rs. 35,000 crore on its books, has also faced pressure for share buybacks. Former top executives of Infosys V Balakrishnan and TV Mohandas Pai have urged the Bengaluru-based IT major to go for a share buyback. “All over the world, for listed companies when growth slows down and there is too much cash, shareholders will ask what are they doing with the cash…about capital allocations. Most Boards around the world will respond with a buyback to show confidence in the company and stabilise the stock price,” Mr Pai said.
Mr Pai, along with former colleague Mr Balakrishnan, had sought a $1.8-billion share buyback in 2014 just as CEO Vishal Sikka was taking over.
Shares of many Indian IT companies are struggling amid slower growth and concerns over tightening of H-1B visa regime by the new Trump administration. Analysts have welcomed Tata Consultancy Services’ move to discuss share buyback and say that if the company’s board approves a big buyback, it will increase pressure on other top IT firms to announce similar moves. Sarabjit Kour Nangra of Angel Broking told NDTV Profit that even in these tough times, top Indian IT companies are generating good amounts of profit and buybacks will be a “comforting factor” for investors.
TCS shares rose over 1 per cent to Rs. 2,443 while Infosys rose 1.6 per cent to Rs. 998. Manav Chopra, head technical analyst at Monarch Networth Capital, said TCS shares look good from a short-term perspective and the stock could head to Rs. 2,550 levels.
Independent market analyst Lancelot D’Cunha, who has a positive stance on IT stocks, said that most of the negatives are priced in and investors could accumulate them, including TCS and Infosys, at lower levels.