Increase in Indian Firms’ Buyback Activity
On Aug 20, 2018, HCL Technologies’ shareholders approved the INR 4,000cr buyback offer announced by the firm. In this buyback program for FY 19, the company will offer INR 1,100 per equity share – a premium of 10% over the prevailing price when the offer was announced in Jul 2018. This is the company’s second buyback in as many years – it had completed a buyback worth INR 3,500cr in Jul 2017. According to the company, this buyback is part of the strategy to return over 50% of the company’s net income to the shareholders.
Indian IT companies have traditionally resorted to paying out Dividends to provide returns to the shareholders. Indeed, the large Indian IT companies have been paying steady dividends consistently for years. The current trend in the industry of using Share Buybacks as a strategy to return cash to the shareholders can be traced down to TCS’s announcement of its share buyback program, the first in the history of the company, in Feb 2017. It completed its buyback worth INR 16,000cr in May 2017. Since then, a number of Indian IT companies have announced and completed Buybacks. The list includes of TCS, which announced its second buyback worth INR 16,000 in Jun 2018; Infosys, which completed buyback worth INR 13,000cr in Dec 2017; Wipro, which completed buyback worth INR 11,000cr in Dec 2017; HCL Technologies, which has announced two buybacks as mentioned earlier; and Mphasis, which completed buyback worth INR 1,103cr in Jun 2017 and announced a second buyback worth INR 988cr in Aug 2018.
This rise in buyback activity is not restricted to the IT services domain – According to a Business Standard article, in the year 2017, 50 companies completed share buybacks worth INR 55,300cr, as compared to 37 firms completing buybacks worth INR 27,900cr in 2016. The trend is continuing in 2018 as well – till July this year, 38 companies have announced buybacks worth over INR 54,900cr.
The reasons for increase in the buyback activity are two-folds. In the Union Budget 2016-17, the finance minister introduced an additional dividend tax on investors earning dividends over INR 10lakhs per annum – this made dividends an unattractive way of distributing wealth back to the shareholders. The other reason is that the companies that were sitting on piles of cash had pressure from the investors to either invest in building capabilities / expand business or return it back to the shareholders. This is especially relevant in the IT services domain, where changing IT landscape does not require to invest a lot in hiring – many processes are getting automated and require less manpower, and most inorganic opportunities in the digital space are small in size. This means that the companies do not need to hold on to a lot of cash for the future, and it makes sense for them to return it to the shareholders.
The ‘season’ of buybacks may not be over yet. Out of the 25 Large-cap and Mid-cap Indian IT services companies that we track, 11 have a cash and equivalents-to-market capitalization ratio of over 10%, with Wipro having the highest ratio of 25%. A high cash-to-market cap ratio is often seen as one of the parameters to ascertain whether the company is holding more cash than required to invest and is not rewarding the shareholders appropriately. This suggests that we may see more buybacks being announced from these companies.