Indian IT players look at capital allocation models of foreign firms

Indian IT services players are increasingly emulating the capital allocation models of global technology majors such as Accenture and IBM for their regular share repurchase initiatives.

In this financial year, while Tata Consultancy Services (TCS) and HCL Technologies (HCL) have already announced share buybacks for the second consecutive year, there are reports suggesting an announcement of such repurchase plans of Infosys in its upcoming board meet on January 11. “We have seen Accenture and IBM returning their excess cash flow to shareholders. That’s what, the IT industry is trying to do (here). This is the most tax-friendly way of returning back cash to shareholders,” said Vineet Nayar, former CEO of HCL and founder chairman of Sampark Foundation.

In June, the board of TCS has approved a buyback plan of Rs 160 billion at Rs 2,100 a share as a part of the company's initiatives to distribute available surplus cash among shareholders. The firm had conducted a similar purchase last year worth Rs 160 billion. Similarly, HCL was the second firm to have a buyback plan this fiscal year under which it announced to pay back Rs 40 billion to its shareholders. The IT services firm in May last year has bought back Rs 35 billion worth of shares. 

Apart from TCS and HCL, Infosys had bought back shares worth of Rs 130 billion while Wipro had repurchased Rs 110 billion of shares during the last financial year. 

“Accenture and IBM give back free cash every year and they have a predictable cash allocation policy that includes buybacks, acquisitions, and investments. I think, Indian IT services firms are hinting at such a consistent (capital allocation) policy,” said Pareekh Jain, founder of consulting firm, Pareekh Consultant.

Global tech majors Accenture and IBM conduct share repurchase every year as part of their plans to return back free cash to shareholders. While IBM in October said it would buy back its shares worth $4 billion as part of this plan, Accenture got the board approval to do an additional share buyback of $5 billion in September.

“Indian software companies are sitting on huge free cash piles for a quite long time and are facing criticism of not deploying them adequately. So, if these companies are paying back through bonus issue or share repurchase, it is good news for the shareholders," said Siddharth Pai, a former outsourcing advisor and founder of Siana Capital.

Analysts also pointed out that as an industry becomes more matured, it follows a consistent capital allocation policy due to more predictable cashflow. “The capital allocation policy is very clear in any matured industry. I think, Indian IT services industry has now indicating at that kind of model,” said Jain of Pareekh Consultant said.