IT companies consider dividends and a mix of buyouts to generate free cash flow

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Bombay and Bangalore: India’s major IT service providers are considering a combination of dividends and share buybacks to return money to their shareholders, key executives from Tata Consultancy Services (TCS), Infosys and Wipro have told ET.

Earlier in the year, TCS completed a Rs 18,000 crore takeover process, the fastest in recent history, while Infosys completed a Rs 9,200 crore takeover last year.

TCS chief executive Rajesh Gopinathan told ET that the company has pledged to return 80-100% of its free cash flow to shareholders and that buyouts and dividends have been nearly 50/50 this year.

“So the mechanism we use to distribute it has tried to balance it with the dividend and the buyback, because both are designed for different stakeholders. There are some stakeholders who prefer the dividend route, there are some stakeholders who prefer the buyout route,” he added.

As of FY22, TCS reported free cash flow of Rs 39,181 crore, or 111.3% of its net income. India’s top IT service provider by revenue returned Rs 31,424 crore to shareholders through buyouts and dividends. Infosys reported free cash flow for the full year at Rs 22,803 crore.

Infosys chief executive Salil Parekh also told ET that the Bengaluru-based company has pledged to return a share of free cash flow to shareholders through a combination of dividends and buybacks over a period of five years. years.

In 2019, Infosys changed its capital allocation policy to return 85% of its free cash flow to shareholders beginning in fiscal 2020. Previously, the company distributed up to 70% of its free cash flow to its shareholders.

“Beyond that, we have a stated policy that we follow, and you may have seen that dividends have also increased significantly in fiscal year 2022 compared to the prior year. We want to continue to ensure that we also reward shareholders with dividends, as we move forward,” Parekh said.

In FY22, Infosys declared a total dividend of Rs.31 per share compared to Rs.27 per share in FY21, an increase of 14.8% per share for the year.

Including the final dividend and the recently completed buyout, the company has returned 73% of free cash flow to shareholders over the past three years as part of its capital allocation policy, management said during the briefing. announces its fourth quarter results.

Although the results of TCS and Infosys did not overwhelm analysts, the strong cash flows generated by the two companies in FY22 were seen as a strong positive for their performance for the year. 23.

According to projections prepared by IDBI Capital Senior Analyst Devang Bhatt, TCS will generate Rs 37,801 crore as free cash flow in FY23 while Infosys will generate Rs 29,739 crore for exercise.

On the other hand, Wipro seeks to pass 45-50% of its net income to investors through buyouts and dividends, CFO Jatin Dalal told ET.

Wipro announced final dividends in the March quarter, but the company’s board is not considering a buyout, Dalal said.

“We’ve generally made buybacks when we didn’t need as much cash on the balance sheet. So almost every time gross cash or net cash has been reasonably high, well above the current level, we have announced redemptions. Right now, I don’t think that’s the case,” he told ET.

According to the repurchase by the market regulator, the Securities and Exchange Board of India (Sebi) and the Companies Act, an offer to repurchase shares cannot be made within one year from the date of closing of the previous buyout offer.

Computer industry body Nasscom has called on Sebi and the Ministry of Commercial Affairs (MCA) to reduce this timeframe to six months, as this would give companies the option of offering buyouts if excess funds are available and in the lack of alternative investment opportunities.

The industry has also asked the government for the waiting period to be the announcement of the buyout for the buyout and not the completion of the buyout for a new buyout, as completion can take one to three months, an executive said. greater than ET.

Gopinathan added that the amount of buybacks was slightly higher than dividends in FY22 because buybacks cannot be executed every year. However, the company intends to give shareholders an equal choice in this matter.

Along with the final dividend of Rs 22 announced in its fourth quarter results, the company announced a total of Rs 43 per share for FY22, up 13% from FY21.

“So the volume we distribute is based on free cash flow, net of acquisitions and investments. So really, the excess capital that we generate in a year and the mechanisms that we use will continue to evolve as the regulatory structure changes,” he said. “We don’t predetermine what the channel is.”

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