Moneycontrol Pro Panorama | The payout party for tech investors is in full swing

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Surging inflation, rising bond yields and the threat of high borrowing costs have triggered selling in shares of global technology companies. The tech stock- heavy Nasdaq Composite index has briefly fallen into correction territory, losing more than 10 percent from its recent peak, on Monday.

Indian IT stocks, as represented by the NSE Nifty IT index, are showing no such concern. The Nifty IT index is up 1 percent at the time of writing this letter and has scaled new high last week. Apart from the valuation, Indian IT companies differ from global tech stocks on various parameters -- two of them being financial metrics and shareholder returns' policies.

Contrary to high-flying global technology companies whose singular objective is growth and business acquisition, Indian IT is equally focussed on cash flows and shareholder returns. In fact, the big four IT services companies have articulated pay-out policies in recent years where they plan to return a large part of their free cash flows or net income to shareholders.

Tata Consultancy Services (TCS) aims to return 80-100 percent of its free cash flow to shareholders. Infosys plans to return 85 percent of the free cash flow cumulatively over a 5-year period from FY20 through a combination of dividends and share buybacks. Wipro expects to return 45-50 percent of its net income cumulatively on a block of 3 years from FY21. Last year, HCL Technologies announced a policy that entails investor payouts of not less than 75 percent of net income cumulatively over 5 years to FY26.

Last fiscal year, TCS alone returned Rs 33,873 crore through dividends and share buybacks. Infosys paid 54 percent more dividends and conducted a large share buyback in FY21. In continuation of its shareholder return policy, the board of TCS will consider a buyback proposal at its meeting to be held on Wednesday, January 12.

Healthy payouts will go a long way in rewarding and reassuring investors, especially when compared to cash-burning new-age technology companies.

The indications are that investors of major IT companies are in for another year of healthy payouts. Research and consulting firms Gartner and ISG are projecting healthy demand for IT services in 2022. Most analysts expect the IT companies to register good growth in calendar 2022 (FY23), which should help them maintain payouts.

“We expect India IT services companies in our coverage to grow at ~1.5x (times) of pre COVID-19 levels over CY22-24F,” Nomura research said in a note.

That said, IT services companies may be a rare exception in steadily rewarding shareholders. As Shishir Asthana explains in this column, apart from IT giants and a few pharma companies buybacks as an instrument for rewarding shareholders did not feature much in 2021. This does not speak well of shareholder friendliness of the broader corporate universe.

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R Sree Ram
Moneycontrol Pro