The problem of plenty for software services firms

Business Standard looks at cash utilisation, M&As and buybacks at Infosys, Cognizant, Wipro and TCS

Indian software services companies are no longer investors’ favourites, as returns on information technology (IT) stocks have declined significantly during the past few years. Their traditional business is going through a decline and they have been late in tuning in to emerging technologies. Besides, the political uncertainty in the US, the largest export market, has only increased. On the other hand, companies have largely been accumulating cash in their books, which generally earns lower returns compared to their core business, and is thus putting pressure on ratios like return on equity. This too is weighing on the stock performance. Not surprisingly then, IT companies are now facing questions on the use of their increasing cash pile. In this backdrop, a look at how the top IT companies have used their cash and their plans to reward shareholders through dividend and buyback:

Infosys: Buyback possible every two years, say analysts

At a time when returns from software stocks have been low, Infosys should look at buyback every two years to stimulate its earnings per share growth, say analysts. 

The country’s second largest information technology (IT) firm is sitting on a large cash pile, with reserves of Rs 35,985 crore or $5.4 billion as on December 31. 

“They should use the entire free cash flow generated per year through either dividend (payment) or a tender offer buyback every two years. It should help the company reduce the number of shares and improve earnings per share. Currently, it has a 40-50 per cent dividend pay-out ratio on the profits earned but is still not allocating the cash on books,” said Madhu Babu, an IT analyst at Prabhudas Lilladher. (Read the full article here)

Cognizant: First at the starting line

Nasdaq-listed information technology (IT )solutions and services firm Cognizant Technology Solutions’ share repurchase programme of $3.4 billion over the next two years has proved a precursor to the buyback programmes announced by some of the Indian IT players.

While Cognizant has been repurchasing its shares from time to time, this is the first time the company will also give dividends to its shareholders. Cognizant will give out a regular quarterly cash dividend of $0.15 per share from the second quarter of 2017 (April-June). (Read the full article here)

Wipro: Balancing M&A and shareholder returns

Wipro, India’s third largest information technology (IT) service provider, has taken an aggressive approach in acquiring companies to step up digital strengths, compared with cross-town rival Infosys, or even Tata Consultancy Services (TCS). 

Since Abidali Neemuchwala became chief executive officer (CEO), the company has made two major acquisitions — HealthPlan Services and Appirio in 2016 —worth nearly $1 billion.

It also announced a buyback worth Rs 2,500 crore in June last year. Analysts say the company has ramped up acquisitions during the past one year and allocated the free cash better through buyback last year. (Read the full article here)

Tata Consultancy Services: A permanent solution needed to address rising cash pile

Even after announcing the country’s largest share buyback at Rs 16,000 crore, Tata Consultancy Services (TCS), the largest information technology (IT) services provider, will be left with a cash reserve of Rs 23,219 crore.

At the end of the third quarter of the current financial year, TCS reported cash reserves (including investment) of Rs 39,219 crore, higher than Infosys’ Rs 35,985 crore. If one looks at TCS’ cash pile, its preferred route to return profits to shareholders via dividends and its poor history of using cash for acquisitions, the company should look at a structured share repurchase programme, say analysts. (Read the full article here)