BUSINESS

Good time for cash-rich IT firms to go for share buy-back

By Shivani Shinde Nadhe and Samie Modak
December 24, 2016 11:26 IST

Higher dividend taxes, falling valuations make alternative shareholder payment attractive, report Shivani Shinde Nadhe and Samie Modak.Dominic Xavier/Rediff.com

Mounting cash piles, increase in taxes on dividend payouts and a fall in valuations makes a case good for share buybacks for the country's information technology companies, feel analysts.

The country's top four listed IT companies are sitting on a combined cash pile of nearly $16 billion (Rs 1 lakh crore).

These have been good at rewarding shareholders over the years, thanks to their huge cash flows and capital-light business models.

However, they have largely stayed away from buy-backs as a tool to reward shareholders.

The tier-1 IT companies typically pay nearly half of their net profits as dividends to shareholders, while the remaining is held as a war chest for capital expansion or acquisitions.

Given the change in regulatory framework, buy-backs in lieu dividends make a compelling case for companies, feel analysts.

Share buy-backs can be of great value as these boost earnings per shares (EPS) and return on equity (RoE) of technology companies.

Kawaljeet Saluja and Jaykumar Doshi of Kotak Institutional Equities, in a report, highlighted that buy-backs assessment can help provide EPS accretion and RoE kicker beyond the immediate financial year.

'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 buy-back programme, in our view,' said the analysts duo in a note.

'Besides being the most tax-efficient means of returning excess cash to shareholders, a structured share repurchase program offers a good long-term boost to EPS/RoE and a floor to valuation multiples,' the analysts duo added.

Ravi Muthukrishnan, co-head, research, ICICI Securities, said IT companies need to make sure they have sufficient cash for good acquisition opportunities otherwise they are better off repaying the cash to shareholders.

"Investors look to IT companies to do good acquisitions with the cash they hold. That's how the game is played. These companies have to be constantly on the prowl for acquisitions. Therefore a war chest is a must," he said.

"However in an environment, where there are no opportunities and industry growth is expected to slow, it could be wise that these companies reward shareholders in the form of buy-backs, he added.

Share buy-backs are also common among other global tech biggies such as Apple, Google, and IBM.

Despite the global precedence, Indian companies have preferred dividends over buybacks.

"In the US, buy-back is a normal mechanism of returns," said Rajesh Gopinathan, chief financial officer, and vice-president, Tata Consultancy Services.

However, he said, “there are not enough examples of buybacks in the Indian context to draw reference. Earlier, the perception was that you do buyback if your stock was hugely undervalued.”

However, a change in the regulatory environment could now push companies to look at buy-backs.

Starting this financial year, shareholders have to pay an additional 10% tax on their dividends in excess of Rs 10 lakh (Rs 1 million).

This is in addition to the 10% dividend distribution tax levied at the company level.

On the other hand, the new buy-back framework allows participation of promoters in share buyback programmes through the tender route without any tax implications such as dividends.

"Traditionally, dividend distribution has been the best route to distribute surplus cash equally among shareholders. With the higher tax impact on dividend distribution and further impact of tax in the hands of large shareholders, companies could explore buy-back as an option to distribute the surplus cash," said Farid Kazani, managing director, Majesco.

The Kotak report also compares the buy-back programmes that Accenture has.

'Accenture's 15.3% EPS CAGR over CY2003-16 was 370 bps higher than the company's (pre-minority) net income CAGR over the period,' the report said.

'The impact on RoE emphasizes the point even more: Accenture's (ex-minority) RoE in CY2016 would have been 13.6% without the cumulative buybacks since 2003. The company's reported RoE for CY2016 was 63.5%.'

Shivani Shinde Nadhe and Samie Modak
Source:

Recommended by Rediff.com

NEXT ARTICLE

NewsBusinessMoviesSportsCricketGet AheadDiscussionLabsMyPageVideosCompany Email