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As the global environment worsens with increasing uncertainty caused by the Russia-Ukraine war, rising energy prices, and inflation, one would expect that companies would be tight-fisted and conserve their resources.
But surprisingly, Indian IT companies are splurging their cash on buybacks despite a cautious outlook. IT giant Infosys announced a buyback aggregating Rs 9,300 crore for Rs 1,850 per share, over and above an interim dividend of Rs 16.50. At the start of the year, TCS had announced a buyback of Rs 18,000 crore. Earlier, Wipro and HCL Tech had also announced generous buybacks.
Even smaller companies in the IT sector like Tanla Solutions have announced a buyback.
Incidentally, the buybacks are announced when at a time the sector outlook suggests a slowdown ahead on account of an economic downturn in North America and Europe.
The results guidance and commentaries of IT companies also suggest headwinds ahead. Reports say top IT companies are slowing their employee addition by 30-50 percent in the second quarter of FY23. Take the case of TCS, it has reduced its net employee addition by 30.3 percent from 14,136 in Q1 to 9,840 in Q2 despite attrition of 21.5 percent. Infosys, on the other hand, slashed addition by 50 percent.
One reason for the reduced recruitment rate could be the falling attrition rates. Infosys in its quarterly results reported that attrition rates have been falling over the last three quarters, hinting at a temporary end to the bull run in the sector.
So if the immediate outlook is weak, why are IT companies using up their cash reserves?
Most of the top IT companies have a strong order book and visibility despite the global turmoil. Some diversion of work from Russia and Ukraine to India is also visible. On the cost front, a rise in the cost of employees has to some extent been cushioned by a depreciating currency.
Indian IT companies are cash-generating machines, with a regular order flow and decent margin. These companies have been able to walk up the value chain without compromising on growth or margins. With few acquisition targets and near zero debt in most cases, these companies have little use for cash. As Infosys found out in its Annual General Body meeting and analysts' conversations earlier, investors are not too happy when companies sit on high levels of cash reserves despite the high visibility of steady cash flows.
Under such circumstances, companies prefer to either pay back investors through a high dividend or a buyback. Over the last few years, buybacks are considered as a better instrument to reward shareholders as compared to dividends.
Unlike dividends which give instant gratification, buybacks have a longer-term benefit for shareholders. Buybacks result in the shrinking of equity capital as the shares collected through buybacks are extinguished, and the earnings per share of the company increase. A buyback also provides a floor to the share price which gives extra comfort to the investor.
Investing insights from our research team
Infosys Q2 FY23 – Why investors should exercise caution despite stellar numbers, buyback
Weekly Tactical: The business prospects of this infra player look sunny
Cyient: An overlooked IT business with reasonable valuation
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Technical Picks: Gold mini, Pennar Industries, CSB Bank, Infosys and Federal Bank (These are published every trading day before markets open and can be read on the app).
Shishir Asthana Moneycontrol Pro
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