BENGALURU: Tata Consultancy Services announced its second stock repurchase in as many years — a move likely to nudge peers to follow suit — as Indias largest software exporter offered shareholders a premium of 15% on its scrip.
The ₹16,000-crore buyback, announced before the companys annual general meeting in Mumbai on Friday, will equal about 2% of its share capital. The company said it would repurchase about 76 million shares at ₹2,100 per share, nearly a 15% premium to the price on the Bombay Stock Exchange. TCS shares closed at ₹1,841.45 on Friday on the BSE.
“The company expects to complete buyback by the end of the second quarter,” said chairman N Chandrasekaran terming the $19-billion company as “shareholder friendly in terms of dividends.” For FY18, “about ₹27,000 crore has been returned to shareholders,” he said.
Separately, industry peer Cognizant on Friday announced a $600-million accelerated share repurchase programme, part of the $3.4-billion corpus it had set aside in 2017 to boost shareholder returns through repurchases and dividends. The Teaneck, New Jersey-headquartered company, which follows the offshore model of Indian IT services firms, had committed $2.7 billion in share repurchases by 2019.
Analysts are of the view that smaller IT services companies will now step up with share buyback programmes as well.
“We expect this to happen” Girish Pai, analyst with Nirmal Bang, told ET.
Spate of Buybacks
He termed TCS buyback as “logical at this point.”
According to the Securities and Exchange Board of India rules, companies have to wait 12 months after a previous buyback to announce another one.
The Mumbai-headquartered company had bought back about Rs 16,000 crore of shares in 2017. It plans to return about 80-100% of the free cash flow it generates in a year to shareholders.
In general, Indian IT services firms have been averse to taking risks and have used their humongous cash reserves only sparingly for new acquisitions. In recent years this has spurred shareholders to demand a greater share of the cash pie.
For instance, activist investor Elliott Management wrote to Cognizant in 2016 demanding that the company shift its business model and commit to return $3.4 billion to shareholders.
This spate of stock repurchases are coming at a time when the Indian IT services industry is being increasingly challenged by technology shifts and growing protectionism in its primary market in the US.
As the traditional model of outsourcing—through which these companies earn an average of three out of four dollars—shrinks, clients are spending more on newer areas of digital, analytics and cloud. Indian firms now earn around 25% of their revenue from newer services.
Urmil Shah of brokerage IDBI Capital said he had factored in a payout of ₹23,900 crore in fiscal 2019 from TCS.
Indias second largest software services company Infosys has also committed to return 70% of the free cash flow in a year and an additional $2 billion from its balance sheet to shareholders in fiscal 2019.