Forbes India 15th Anniversary Special

TCS board approves share buyback up to Rs 16,000 crore

Investors in the Indian IT sector are expecting better returns, in line with practices followed by overseas competitors such as Accenture, analysts say

Published: Feb 20, 2017 04:50:37 PM IST
Updated: Feb 20, 2017 05:17:21 PM IST

TCS board approves share buyback up to Rs 16,000 crore
Image: Vivek Prakash / Reuters

Shares of Tata Consultancy Services ended over 4 percent higher in Mumbai trading on Monday in anticipation of the announcement of a buyback at the country’s largest IT services company. The announcement came shortly after markets closed.

Tata Consultancy has been authorised to purchase up to 5,61,40,351 shares at the “buyback price” of Rs. 2,850, totaling to Rs 16,000 crore, the Mumbai-based company told stock exchanges in a statement. The number of shares equal about 2.85 percent of the company’s paid up capital.

Tata Consultancy’s buyback plan comes at a time of transition for both the company and the larger Tata group, of which it is by far the most valuable constituent. N Chandrasekaran, former CEO and MD of TCS on January 12 made way for his colleague Rajesh Gopinathan for the top post at the IT services company. On Tuesday, Chandrasekaran takes over a larger role — as Executive Chairman of Tata Sons.

Buybacks seem to be in vogue among other IT services companies as well, with TCS’s rival Cognizant announcing a $3.4 billion purchase recently, and Bengaluru rival Infosys also reportedly considering one. Infosys recently declined to comment on media reports of a Rs 12,000 crore buyback plan, while not denying it outright.

TCS’ buyback offer is expected to proceed smoothly as the company does not have to take any shareholder approval as the maximum number of shares to be bought back is less than 10 percent of the paid up capital of the company. Still, the company has decided to take shareholder consent through a postal ballot.

Analysts also point out that investors are expecting better returns from the Indian companies in line with practices followed by overseas competitors such as Accenture.

“With maturity in growth of Indian IT, the imperative to return excess cash to shareholders is high,” analysts Apurva Prasad and Amit Chandra at HDFC Securities wrote to clients in a note on February 16. “We believe that there is scope to optimise capital allocation, especially the buyback route with valuations also at historical lows.”

Accenture’s payout (dividend and buyback) to shareholders is twice the rate of Indian IT at 106 percent payout-to-free-cash-flow, whereas the ratio is 54 percent for Indian IT companies, the analysts wrote. “Cognizant’s recent change in capital allocation policy is in congruence to the maturing dynamics of the sector,” they added.

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