Bengaluru: Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd returned $9.75 billion to their shareholders in the year ended 31 March, the highest ever in their history, under pressure from investors after they failed to deploy their cash hoard to grow their business.
The decision to return money to shareholders, through dividends and share buyback, also appears to have contributed to a reversal in performance of these stocks. After posting negative returns in 2016-17, TCS shares outperformed the benchmark BSE Sensex while Infosys shares matched the Sensex’s 11% return and Wipro returned 9% gains.
The IT firms are likely to continue with their practice of returning cash to shareholders. Infosys said that in addition to returning 70% of free cash flow its generates in a year, the company will return an additional $2 billion to shareholders in the current year while Wipro said that the company intends to return up to half of its net income to shareholders.
The three companies together have more than $12 billion in cash, in addition to generating about $7.5 billion in cash every year, suggesting that these companies have enough cash to reward their shareholders.
Still, a few analysts say that IT services companies can deploy cash in buying companies or investing in newer technologies which can make these companies future-ready, rather than merely returning cash to shareholders.
“We think INFY (Infosys) should prioritize improving its services portfolio through M&A, over return of capital," Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 23 April, after Infosys briefed analysts in Mumbai. “We think INFY should emulate ACN’s strategy of acquiring and integrating digital skills/talent, particularly in areas of focus such as design and creative."
For now, management at all the three firms maintain they have enough cash for carrying out mergers and acquisitions.
Two reasons explain this changed approach by IT firms.
Firstly, IT firms are struggling to grow their businesses, and this move is primarily to placate investors. For the second consecutive year, TCS, Infosys and Wipro grew slower than industry body, Nasscom’s estimate for the $167 billion IT outsourcing sector. TCS reported a 6.7% growth in constant currency terms, while Infosys and Wipro reported a 5.8% and 2.9% growth, respectively, in 2017-18, slower than Nasscom’s 7.8% growth estimate for the overall industry.
In 2016-17, TCS and Infosys reported an identical 8.3% growth while Wipro reported a 7% growth, again slower than Nasscom’s 8.6% growth estimate in 2016-17.
TCS saw its operating margin narrow by 90 basis points while Infosys and Wipro saw their margins decline by 40 basis points and 220 basis points, respectively.
“None of the companies have spent any large sum on acquisitions (in FY18). So before any questions are raised, management have realised it’s natural to reward shareholders rather than keeping the money in the banks," said an executive at Wipro.
Secondly, share buybacks help a company improve its return on equity, which means that an investor can make higher returns from investing in the company.