Buybacks in sight as IT firms' share prices fall

Capital Allocation

- TCS, Infosys and Wipro hold cash reserve of over $10 bn in FY22

- Infosys aims to give back 85% of its free cash flow to shareholders

- TCS committed to return 80-100% of free cash flow to its shareholders

- Birlasoft among mid-tier IT firms announced Rs390-cr buyback 

Bengaluru: With sharp correction in share prices of Indian IT companies, many of these are likely to come up with share buyback plans in the coming quarters. Experts are of the opinion that given the underperformance of IT sector in Indian stock market, the possibility of holding share buyback looks bright in the next one-two quarters.

"Companies conduct buyback when they come to a conclusion that their share prices are undervalued. It is a sign of signalling the market the fair price of their stock values. As far as Indian IT companies are concerned, many of these firms are sitting on huge cash reserve. So, the possibility of such buybacks seems high," said Siddharth Pai, an IT outsourcing advisor & Founder and Managing Partner of venture capital firm Siana Capital Management.

He said that like large peers, mid-tier companies may conduct such buybacks depending on the cash reserve sitting on their balance sheets.

Earlier in the year, market leader Tata Consultancy Services (TCS) completed a Rs18,000-crore buyback process. This is the fourth buyback from TCS. Previously, the company did a buyback worth about Rs16,000 crore in January 2021.

Similarly, Infosys completed a Rs9,200 crore buyback last year. While Wipro completed a buy back worth Rs9,500 crore last year, HCL Technologies had conducted a share buyback worth Rs 4,000 crore in FY19. Among mid-tier IT companies, Birlasoft has recently announced a buy back worth Rs390 crore. Since the beginning of this year, Nifty IT index has underperformed as compared to the broader index. Share prices of most large and mid-tier IT firms have corrected in the range of 20-60 per cent in the first eight months of 2022.

Given the underperformance, there is a likelihood that boards of these companies may decide to share purchase to prop up share prices. Moreover, experts said that as one year has passed since the last buyback for many large firms, announcement of such buyback can't be ruled out.

"Though uncertain economic environment requires companies to hold on to cash, big IT firms have cash reserves way above their need," said Pai.

As per capital allocation policy of Infosys, Infosys aims to give back 85 per cent of its free cash flow to shareholders. TCS is committed to return 80-100 per cent of free cash flow to its shareholders. On aggregate basis, TCS, Infosys and Wipro hold a cash reserve of more than $10 billion by the end of FY22.

Companies conduct buyback when they come to the conclusion that their share prices are undervalued. It is a sign of signalling the market the fair price of their stock values. As far as Indian IT companies are concerned, many of these firms are sitting on huge cash reserve. So, the possibility of such buy backs seems high

-Siddharth Pai, Founder and Managing Partner of Siana Capital Management