With Rs. 16,000 Crore Buyback Announcement, TCS Puts Pressure On Other Top IT Firms

February 20, 2017, 4:21 PM
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A share buyback programme is a way to return money to shareholders.

TCS said the share buyback will happen at price of Rs. 2,850 under tender offer route
The board of Tata Consultancy Services or TCS today announced a share buyback or repurchase programmme of up to Rs. 16,000 crore, sending the shares of India’s biggest outsourcer as much as 6 per cent higher. Today also marked the last day of Natarajan Chandrasekaran, popularly known as Chandra, as chief executive officer and managing director of TCS. Tomorrow, he would be stepping into a bigger role, as chairman of Tata Sons, the holding company of the $100-billion salt-to-software Tata conglomerate. Replacing Mr Chandra at TCS will be Rajesh Gopinathan, who will assume the role of CEO and managing director. Shares of TCS ended 4 per cent higher at Rs. 2,506 on the BSE today. Analysts say that with TCS announcing a big buyback programme, other top IT companies would come under increasing pressure to follow suit with similar offers.

Here are 10 things to know:

1) A share buyback program is a way to return money to shareholders. The company buys back its own shares from the market, usually because the management thinks the shares are undervalued. Analysts prefer buybacks over dividends, as the former is a more tax-efficient way to return money to shareholders.
2) TCS said the buyback will happen at price of Rs. 2,850 per share under a tender offer route from existing investors. Under the tender offer route, existing investors will be given an option to sell a part of their shareholding to the company at the price decided by the company.

3) The buyback price of Rs. 2,850 is 18 per cent higher than Friday’s close of Rs. 2407. TCS said it will buy back up to 5.6 crore shares, which represents 2.85 per cent of the total paid-up equity share capital of the IT company.

4) Pankaj Sharma, an independent market analyst, said the Rs. 16,000 crore buyback announcement will help support sentiment in TCS shares in the short term. But over the long term, share prices would be determined by how the IT major is able to navigate the headwinds, from changing technological landscape to concerns over H-1B visas, say analysts.

5) Sanjeev Hota of Sharekhan said that Tata Consultancy Services’ move will put pressure on the other big Indian IT companies, notably Infosys, to return money to shareholders in form of share buyback.

6) Former top executives of Infosys V Balakrishnan and TV Mohandas Pai have urged the Bengaluru-based IT major to go for a share buyback.

7) Top Indian IT companies are under pressure to return some of the huge cash piles on their books to shareholders in the form of share buybacks as the overall industry growth slows down.

8) “Nearly all IT companies are sitting on excess capital that is diluting return ratios and has corresponding impact on valuations. A sizable cash balance and an operating engine churning consistent and strong free cash present a strong case for Tier-1 ITs to pursue a consistent share buyback program,” Kotak Institutional Equities said in a recent note.

9) TCS, for example, has around Rs. 40,000 crore on its books while Infosys Rs. 34,000 crore and Wipro around Rs. 33,000 crore.

10) Rival Cognizant’s board earlier this month approved a plan to return $3.4 billion to shareholders over the next two years through a combination of share repurchases and dividends. – NDTV

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