Tata Consultancy Services: A permanent solution needed to address rising cash pile

Unlike peers Wipro and Infosys, TCS has been more cautious about mergers and acquisitions

Even after announcing the country’s largest share buyback at Rs 16,000 crore, Tata Consultancy Services (TCS), the largest information technology (IT) services provider, will be left with a cash reserve of Rs 23,219 crore.

At the end of the third quarter of the current financial year, TCS reported cash reserves (including investment) of Rs 39,219 crore, higher than Infosys’ Rs 35,985 crore. If one looks at TCS’ cash pile, its preferred route to return profits to shareholders via dividends and its poor history of using cash for acquisitions, the company should look at a structured share repurchase programme, say analysts.

Read our full coverage on how IT firms have used their cash pile

Indian IT services in general and the top four players in particular have been sitting on huge piles of cash for years, owing to an operating model that generates strong free cash flow (surplus cash after meeting capex needs). However, unlike global peers, the top players have not been too acquisitive and have opted for organic growth.

 

Historically, Indian IT players have preferred to give back profits to shareholders in the form of dividends, mostly in the range of 25 to 40 per cent of profits. In the case of TCS, too, the dividend range has been 30 to 35 per cent in the past three years (barring the special dividend pay-out in FY15). In an earlier interaction with Business Standard, the then CFO now chief executive, Rajesh Gopinathan, had said buyback as a tool to reward shareholders is not too popular in India. “Also, 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. It carried different market perception. In the US, buyback is a normal mechanism of returns,” he added. 

In FY15, the company announced a special dividend for shareholders for completing 10 years of listing. For FY15, it rewarded its shareholders with dividend of Rs 15,474 crore, nearly two and a half times more than its pay-out a year ago. 

Unlike peer Wipro and Infosys, TCS has been more cautious about mergers and acquisitions (M&A) and, hence, its cash reserve utilisation has been much lower in this activity. In the 49 years of its existence, the company has acquired six firms. One of the largest acquisition it did was in 2008 of Citigroup Global Services, for $512 million. The deal was an all-cash transaction. After that, it acquired France-based Alti for $98 million in 2013. In 2012, it took over Computational Research Laboratory for $33.8 million. Rather the company has preferred to go the organic way when it comes to starting new verticals or offerings. Diligenta, its UK-based life insurance and pensions business process management provider, is an example.

 

Digital revenue, for 16.8 per cent of the company’s top line, has also been built in-house. Instead of acquisition, the company has invested in creating a co-innovation network that touches about 1,300 start-up companies across multiple technologies.

Looking at its cash and equivalents and the quarterly net profit run-rate of about Rs 6,000 crore, TCS’ cash kitty will start swelling again. Investors expect TCS to find a permanent solution for this cash and enhance shareholder value.