TCS, Cognizant buybacks to test investor faith in Indian IT

The share buybacks being looked at by information technology (IT) companies would be a litmus test that will reveal how much confidence their investors or shareholders have in them at a time when market sentiments about the sector are at the lowest, analysts and market observers said.

After Nasdaq-listed Cognizant recently announced a $3.4 billion buyback plan, largest IT services company TCS on Thursday said its Board of directors would consider a proposal for buyback of equity shares on February 20.

Meanwhile, some of the former management of Infosys have also pressed for a buyback, given that the company's pace of growth had slowed and there were large cash reserves with it.

Jankiraman Srinivasan, founder of a start-up Nuvepro and former chief technology officer (CTO) of MindTree, saw the initiative of the software exporters to buy back shares of investors as a message that they had faith in the IT sector and believed that its future was bright.

"My belief is that all of them (IT firms) feel that the market is looking too negative and the (share) prices are low and this is the time they have to show that they have confidence in the IT sector and expect it to grow in future," he said.

Srinivasan expects existing investors who still have faith to not sell shares back so that they can reap better returns in the long term.

"My feeling is long-term investors will put faith, especially the people who understand the sector and look at it (current crisis) as a temporary phenomenon – whether it is market slowdown or concerns over the H1-B visa issue. These are something that will not last forever because the US market cannot grow without Indian talent, and it will impact their economy and so they (US) will have to liberalise (rules) down the line," said the former MindTree executive.

Harit Shah, IT analyst at Reliance Securities, considers buybacks as means of returning money to the shareholders.

He expects Infosys and other IT firms to follow suit due to peer pressure.

Shah said buyback will help the IT services companies to improve their earning per share (EPS) and return on equity (RoE) and ultimately prop up valuation if the shares were priced at a "decent premium".

He backed the move as it was a more productive way of using the huge cash piles than letting it lie idle due to not many opportunities for acquisitions or strategic investments now.

Srinivasan said technology companies should offer a good premium over the current market price for their buyback offer to assuage investors' concerns about the sector.

"If there is no premium to the current market price then why should they (investors) sell? There should be some gains for the people who are selling it back. It (premium) will also transmit a message from companies that IT stocks are currently under-priced," he said.

Jankiraman said the percentage of shares offered for buyback would depend on the float in the market. Incidentally, among the large IT services companies, Infosys is said to have the largest percentage of shares with retail investors while the public floats of TCS and Wipro are relatively lower.

In a chat with DNA Money over phone, V Balakrishnan, former CFO of Infosys, had questioned the current 20% of market capitalisation as cash when the growth had dwindled to a single digit 7-8% compared to a double digit growth of over 15% in the past.

"Every investor will push for it (share buyback) because you can't have 20% of your market cap as cash when the growth has come down to 7-8%. Even, Nasscom (industry lobby body National Association of Software and Services Companies) is saying they are not able to predict next year's growth now. So, when growth has come down, you have transformed from growth stock to a valued stock," he said.

According to him, dividend was not a tax-inefficient way of using the huge Infy's case pile.

Elaborating his point, he said; "They (Board) should have minimum cash on the balance sheet. They (Board) have $6 billion of cash, at least half of it should use to do a one-time buyback. And going forward, they could use, maybe, 80-90% of the cash to distribute it to the shareholders in the form of dividend on buyback shares. They can use it (part of the $3 billion) for strategic objectives. $3 billion is more than enough."