With the Tata Consultancy Services board slated to consider buyback of equity at a meeting on Monday, a former chief financial officer (CFO) of Infosys has said that the Bengaluru-headquartered IT giant too needs to consider the buyback option for "enhancing shareholder value".
"It (buyback) is the right thing to do because the IT services industry is transforming from a growth stock to a value stock," former Infosys CFO V. Bala told BTVi in an interview.
He pointed out that as per industry body Nasscom figures released on Wednesday, the IT sector is poised to grow at 8.6 per cent in the current fiscal, which is the "lowest ever we have seen".
"Any sensible board will look at and understand the transition to value stock and return more money to shareholders," he said.
Indian IT companies in recent years have seen only single-digit growth, leading to low shareholder returns, which has provoked firms to look at the buyback option as another means of rewarding shareholders.
"Lots of things have changed for the industry... earlier we were growing at 40-50 per cent. When you are a growth stock, you require cash for further growth. Also, cash as a percentage of market capitalisation was very low at that point of time," the Infosys ex-CFO said.
Among other IT companies, Cognizant recently announced a $3.4 million buyback, while Wipro and Accenture have conducted their own.
Bala elaborated on the mechanics of this major transformation being witnessed in the IT sector.
"Infosys is sitting on $6 million of cash, with a market capitalisation of $32 billion, which is 20 per cent, and growth has come down to single-digit. When 25 per cent of other incomes comes from financial income, you are no longer a software stock but a financial services stock " he said.
"When things change, when the context changes you have to understand the transition and look to return more money to shareholders," he added.
He said that both in the near- and medium-term, there is no need to keep large cash for acquisitions or strategic objectives, because the purchase of new technology is very costly.
"All companies have clearly said they don't want yesterday's technology, while new technology comes at a very high price, where your ability to generate returns on top of the purchase price, your IRR (internal return of return), is very limited," Bala said.
According to Bala, for companies and boards, whose primay task is to increase shareholder value, buyback would be the sensible course in the current scenario.
"I think if you have large cash, you should return money to shareholders. It'll improve returns, improve EPS (earning per share) and generate shareholder value," he said.
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