TCS triggers share buyback bonanza, Infy takes the cue
Feb 16 2017 , Mumbai
TCS gains 1% at Rs 2,446.90. Infosys rises 3% to Rs 1,011.90
This puts Infosys — already caught in a maelstrom over capital allocation among other issues — under pressure to come out with its own buyback plan. In fact, within hours of TCS’s statement to bourses, a press release by Infosys said the company “periodically” reviews the capital allocation policy and the management will take a decision on share buyback at an “appropriate time.”
TCS shares ended the day over 1 per cent higher at Rs 2,446.90 on BSE, while Infosys rose over 3 per cent to settle the day at Rs 1,011.90. Of late, IT companies have been under severe pressure from investors to return a part of the huge pile of cash on their books as they have been facing major headwinds to their businesses. On 8 February, Cognizant board approved to return $3.4 billion to its shareholders over the next two years through share buybacks and dividend. Industry watchers had said that Cognizant offer would trigger investor demand for similar action from domestic IT companies.
Also, the performance of IT companies has not been too great for various reasons. Software firms earn more than one-third of their revenues from banking financial services & insurance (BFSI) vertical. With global banks cutting costs and deferring technology investments, Indian IT firms face not so rosy future, prompting many investors to share the wealth with them via share buyback.
The demand is not sans reason as the cash on the book of top 10 IT firm stands at a staggering Rs 70,000 crore. TCS had Rs 43,169 crore in cash and investments on its book at the end of December 2016, while Infosys is sitting on a cash pile of Rs 35,697 crore or $5.25 billion.
Analysts said the timing for a buyback programme has never been better than the present with earnings yield (inverse of the P/E ratio) now higher than the post-tax return on cash.
Cash on book as a percentage of market cap is quite high for some IT firms. Infosys’ cash to market cap stood at 15.7 per cent, while that of TCS was 9.3 per cent, Wipro 29 per cent and Tech Mahindra 7.3 per cent. Also, high dividend distribution tax rate makes buybacks the preferred route.
According to JP Morgan analysis if Infosys flushes out excess incremental cash over 5 years (FY18-FY22) through a judicious buyback (addressing the flow issue) while also buying back 10 per cent of its current cash pile ($5 billion including cash equivalent), its FY22E ROE would stand at 28 per cent, a good 800bps better than the current 20 per cent.