Will Tata Sons gain from a TCS share buyback again?
Will there be an encore for Tata Sons this year from the buyback of shares announced by Tata Consultancy Services (TCS)? Tata Sons has a 73 per cent stake in TCS and, if it tenders shares, could stand to gain around Rs 10,000 crore from the Rs 16,000 crore share buyback. This would be similar to last year, when it tendered over 3.61 crore shares translating to around Rs 10,000 crore. Seen from a shareholders' perspective, this may be the best move for TCS, the oldest and the biggest Indian IT company. After all, shareholders who have invested need to be rewarded. However, analysts raise two points. One, if it is a growth story, would tendering the shares be the best option for the investor? After all, Rajesh Gopinathan, Chief Executive Officer and Managing Director, TCS, had said in the earnings call after the financial results for FY18 were announced: "Combined with strong exit that we got from Q4 performance, we are well placed to continue on this growth momentum through FY '19. As I mentioned, six of our eight industry verticals grew upwards of 9 per cent in FY'18, four of them growing in double digits. We hope that this kind of momentum will continue."
The other, and an equally important, point that some of the analysts raise is the nature of capital allocation that IT companies, leading with TCS, need to look at. The need of the hour, as one analyst pointed out, is for the IT companies, including TCS, to focus their capital allocation on setting up international development centres and building their onsite presence. This, coupled with setting aside capital for acquisition of key capabilities that make them more effective in the world of digital, may be a more pressing need. After all, as Gopinathan had also pointed out in the earnings call: "Many of our customers are embarking on their Business 4.0 journey, and as their preferred partner we are benefiting from the resultant uptick in their digital spending. We had a strong set of large deal wins this quarter, and the deal pipeline looks very good across the board." But then, one could argue that setting up development centres today may not be a huge capital allocation challenge considering that many in the IT sector are tending to opt for an opex (operational expenditure) model where plug and play facilities could be hired.
For the moment, however, the company clearly seems to think that returning money to the shareholders is an issue that needs to be addressed. That it has chosen to take the buyback route, a more tax-efficient route than dividend payout, should make its shareholders - the retail investor or the largest shareholder - happy.