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TCS likely to buyback shares to boost shareholder returns

Shailendra Bhatnagar/SNS | New Delhi |


Tata Consultancy Services will consider a proposal to buy back its shares from the market as the software developer seeks to put a floor under its stock and stave off criticism from activist shareholders seeking a better return on their investment.

TCS, sitting on a cash pile of more than Rs.29,000 crore, informed the exchanges on Thursday that its board will consider a proposal to buy back shares in its meeting slated for February 20. Mumbai-based TCS is the first software company to discuss a buy back in an overall tepid business environment for technology companies. TCS, valued at Rupees 4.82 lakh crore, has slumped 13 per cent from its most recent high of 2,840 rupees, stuck in October 2014. The stock has fallen due to inclement global economic conditions. TCS` most recent low was of 2,069 rupees a share, hit in early November as the broader markets contracted in the face of the government's surprise demonetization move.

The move to consider a buy back by the Tata Group, which controls 73.4 per cent equity in TCS, comes against the backdrop of an embarrassing public battle ongoing between the founders of smaller rival Infosys Technologies Ltd. and the company's board. Infosys' founder N R Narayana Murthy is butting heads with the chairman and the CEO of Infosys on how to manage costs and provide a better return to shareholders. Infosys, sitting on $5 billion in cash, has often been criticised by some institutional investors that it should either return a part of this cash hoard to investors via a one-time dividend or institute a share buyback plan to boost value for remaining shareholders.

Infosys surged 3.1 per cent to 1,012 rupees as investors speculated that TCS' move would force Infosys to announce a similar buy back.

Technology companies, which disgorge large amounts of cash from ongoing operations, have traditionally kept liquid cash on their balance sheets in a bid to have a cushion during economic downturns and also keep their powder dry in case a good acquisition comes up. Infosys, for example, raised cash by selling fresh capital in 1999 to create a fund for a large scale acquisition. That plan is yet to fructify after 16 years and the company's cash pile has grown dramatically over the last decade. A large amount of cash results in deterioration of operating ratios and leads to longer term shareholders being short changed.

“We need to decide what is the safe amount of cash that we should retain,'' Natarajan Chandrasekaran, Chairman-Designate of Tata Sons, the parent of TCS, said. “We have to keep a minimum amount of comfort.'' 

Chandrasekaran was the Chief Executive Officer of TCS before being elevated as chairman of Tata Sons earlier this year. The philanthropic Tata Group also depends upon its cash cow TCS to keep making substantial dividend payouts to fund its social obligations.

India's export oriented technology sector is being buffeted by a global headwind of lower tech spending and an increasingly hostile business environment in the United States, the main market for their services.  US President Donald Trump, in a bid to save local jobs, has taken steps to limit companies such as TCS and Infosys from sending relatively cheaper Indian software coders to the United States. It is in this kind of uncertainty that tech CEOs prefer the safety of cash on their balance sheets instead of instituting buy backs or paying one time dividends.

It is this level of uncertainty that also prompted industry body NASSCOM from giving its annual forecast of the sector's growth trajectory. Investors, too, have acted upon this unpredictability, which is visible in the 11 per cent fall in the sector benchmark over the last 8 months.

TCS rose 1.5 per cent higher at 2,450 rupees with Rupees 512 crore worth of shares changing hands on the National Stock Exchange. The stock has been one of the biggest wealth creators for long term investors since it got listed in 2004