TCS buyback may trigger fresh trend in IT sector

The board of TCS will consider the buyback at a meeting on February 20
Image: Danish Siddiqui / Reuters

Tata Consultancy Services (TCS), the most valuable company of the Tata group, will consider a share buyback, signaling the chairman-designate of parent Tata Sons, N Chandrasekaran, is moving swiftly to demonstrate all is well at the group that ousted Cyrus Mistry from that post recently.

The board of TCS will consider the buyback at a meeting on February 20, TCS told the stock exchanges in a statement on Thursday, sending shares just a wee bit up. As per the law, companies are allowed to go in for a buyback amounting to 10 percent of their net worth without passing a shareholder resolution. As at March 2016, the net worth of TCS is at Rs 58,867 crore. The company can go for 10 percent or Rs 5,886 crore worth of buyback.

The buyback comes at a time when a combination of technological and business-model shifts and calls for increased protection of local jobs has led Nasscom, the industry lobby, to postpone its annual forecast. On Wednesday, Nasscom executives confirmed the industry will end the current fiscal year with growth of over eight percent, but pushed back the announcement of an estimate for the next year that starts April 1.

Investors and fund managers are applauding this situation because a buyback in shares only boosts the earning per share of the company. While buybacks are not new to the Indian market, they are not as popular when compared to the US market.

“This is because the Indian mentality is to hold on to cash. Most of our businesses are promoter owned and they like the idea that there is a lot of cash with the company. Buybacks happen when the management is professional and the industry has matured or going through a slow growth period. I think the software industry is exactly in that spot”, says a fund manager who has studied Indian companies through the mid-nineties.

The Indian software sector is showing signs of slowing down. It is also considered to be the best time to go in for a buyback because companies get to buy their stocks at lower valuations as compared to the past. Most of the top IT companies have a lot of cash on their balance sheet. Their options are either to go in for high dividend payouts or buybacks. IT companies prefer to go in for buybacks which is a good thing because it boost the earnings per share.

“Buybacks work better than paying dividends because payment of dividends attracts a 20 percent dividend distribution tax. So if a company wants to do a dividend distribution of Rs 5,000 crore it is better off going for Rs 6,000 crore of buyback and also save on the tax”, says Neelesh Surana, chief investment officer-equity, Mirae Asset Global Investments Management. He also agrees that if TCS goes in for a buyback it will set a precedent and more companies may follow suit.

A share buyback is possible only for large-cap companies because their shares are liquid or very easy to buy or sell unlike mid-cap companies whose stocks are not as liquid.Buybacks have been used by American companies very effectively in 2013 after the world came out of the financial crisis. According to The Economist, “The companies in the S&P 500 index bought $500 billion of their own shares in 2013, close to the high reached in the bubble year of 2007, and eating up 33 cents of every dollar of cashflow.”

In general, share buybacks are associated with technology or software companies that do not have any debt but a lot of cash. For instance a big company like Apple, which has a massive cash pile of $17 billion, has been told by shareholders to go in for a share buyback if it doesn’t have any big investments to make. In India, Infosys is also talking about a share buyback and Cognizant recently announced a $3.4 billion buyback plan.