IT heavyweights surge past buyback price

Investors in information technology (IT) stocks who tendered their equity shares in recent buyback offers have missed out on the current rally, as most of the stocks are trading higher as compared to their respective buyback price.

Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies, Wipro, Mindtree and Danlaw Technologies have rallied by up to 45% from their buyback price. These seven IT companies had bought back equity shares worth around Rs 439 billion from their shareholders, including promoters.

Most companies had announced a buyback over the last one year as the stocks underperformed the market. That apart, companies sought to reward shareholders in proportion to their shareholding, thereby enhancing the overall return to shareholders. A buyback is generally expected to improve return on equity (RoE) and earnings per share (EPS) by reducing the equity base.

The IT sector underperformed the Sensex in 2017 as revenue growth was tepid while investment in the business and a strong rupee kept margins in check, analysts say. While management commentary on deal pipelines and spending intentions were upbeat through most of 2017, it did not translate into deal wins and growth thus impacting both sentiment and stock performance.

In calendar year 2017 (CY17), Nifty IT index was up 12.2% as compared to 28.6% rise in Nifty 50 index. The S&P BSE IT index gained 10.8% in CY17, too underperformed the S&P BSE Sensex, which rallied 27.9% during the year.

"Most of these IT stocks had been beaten down badly, down to 13 - 14x price-to-earnings on a trailing basis even in this bull market. These stocks are now playing a catch-up and most appear stretched and I do not see a huge upside from the current levels. That said, investors can hold on to Infosys and HCL Technologies and should exit from the mid-cap IT names," says G. Chokkalingam, founder & managing director, Equinomics Research.

Among individual stocks, TCS hit a new high of Rs 3,255 on BSE on Wednesday and is trading 14% higher as compared to its buyback price of Rs 2,850 per share. In May 2017, the company had bought back 56.14 million equity shares for an aggregate amount of Rs 160 billion.

"The buyback is a capital allocation decision taken with the objective of seeking a fairer valuation of the Company's stock while improving the Company's Return on Equity, and increasing shareholder value in the longer term," TCS said while announcing buyback.

Infosys hit a fresh 52-week high of Rs 1,220, trading 6% higher against its share buyback price of Rs 1,150. The stock is quoting close to its all-time high of Rs 1,278 touched on June 3, 2016 in intra-day trade. Infosys had bought back 113 million shares for a total consideration of Rs 130 billion.

Going ahead, analysts expect a turnaround in IT spending, which could rekindle investor interest in these stocks. Analysts at Kotak Institutional Equities, for instance, suggest industry-wide acceleration in growth rates is possible in FY2019. A strong economy across key markets, low unemployment in the US, rising interest rates and an environment supporting growth for IT spends in the banking vertical bodes well for the Indian IT sector, they say.

"The key end-user industries that are clients of Indian IT are performing well. The retail segment is finally finding its bearings after being badly hit by the Amazon effect. Other verticals are also in a reasonable shape. IT spending by BFS clients is healthy though incremental spends are being directed internally," point out Kawaljeet Saluja and Jaykumar Doshi of Kotak Institutional Equities in a report.

That said threat from automation, delay in tech spends, rupee appreciation and any renewed concerns on regulations, especially visas, or new US tax laws are the key risks that need to be watched for.

Among IT stocks, Morgan Stanley has upgraded Infosys, Tech Mahindra, MphasiS, HCL Technologies, Persistent and Cyient to overweight rating; maintains equal weight rating on TCS and has an underweight stance on Hexaware and MindTree.