Buyback: After TCS, other IT companies could follow suit

There could be many more buyback announcements in future coming from Indian information technology companies as many of them are sitting on loads of cash and on the other hand inorganic growth opportunities look scare, according to experts. TCS on Monday announced buyback of shares worth ₹16,000 crore, making it the biggest in the history of India’s capital market.

According to data provided by Capitaline, out of 39 companies with annual revenues of more than ₹500 crore, 27 companies have cash to market capitalisation (m-cap) in the range 10-36 per cent. Ten companies have cash to m-cap of more than 20 per cent. A very high cash to m-cap is not taken positively as it indicates that the company is neither growing inorganically nor rewarding or returning the cash to its shareholders.

A high cash to m-cap ratio also means that the company may be undervalued due to lack of growth opportunities or amid tepid sentiments towards IT stocks.

A total of 19 companies have touched their 52-week lows in the last six months. Hence, the need to announce a buyback.

Many Indian IT companies have been infamous for holding on to cash for many years. According to data provided by Capitaline, only nine IT companies, namely, Zensar Technologies, Wipro, Mastek, Mphasis, Hexaware Technologies, Polaris Consulting and Services, R Systems International, e-Clerx Services and Infinity Computer Solutions India have conducted buybacks in the past.

TCS is the tenth company to announce a buyback, a gigantic at that.

“I see the trend catching up from credible and quality companies. Buybacks, especially from large companies, are very much possible as their valuations are at lows,” said G Chokkalingam, Founder, Equinomics Advisory and Research.

Pankaj Pandey, Head — Research, ICICI Securities, pointed out that growth opportunities are drying up and requirements for capital to spend would not be high. “There has been an overall slowdown in spending by clients since the banking and financial services industry has suffered due to the low interest rate scenario. It is still early days,” he said.

Edelweiss Securities agrees with the view. “While domestic IT companies shift the focus to small skill-based (companies), rather than large acquisitions, the need to maintain a huge cash pile is waning. This implies higher distribution, either in the form of buybacks or increase in dividend payouts,” it said in a note.

There are growing expectations that Infosys could also announce a buyback since it has a highcash to m-cap. “There is a capital allocation policy which is in place which we will review periodically and this will be addressed and we will let you know. I am not ruling out; I am saying that there is no decision on the table as yet.

“But we will do that,” said R Seshasayee, independent director and non-executive chairman at Infosys, in a press conference on February 13.