Why IT Majors, From TCS To Infy And HCL, Are Raining Cash On Shareholders

Somewhere around early 2017, when the Indian software services industry seemed to be struggling for growth and margins, the top managements of the major companies decided that keeping cash on the books was not such a healthy thing after all.

Since then, they have been raining cash and free shares on shareholders. Consider what the top four IT services companies have done since early 2017:

TCS has announced two share buybacks, one executed last year and another announced this year (amounting to Rs 32,000 crore together), and also a bonus issue of 1:1 this year.

Infosys announced a Rs 13,000 crore share buyback last year and followed that through this year despite so-so results with a 1:1 bonus issue. With the board deciding that it will return 70 per cent of free cash flows to shareholders, another buyback or high cash payout through higher dividends this year, worth over Rs 10,400 crore, cannot be ruled out.

HCL Tech announced one buyback last year and another is coming this year, dishing out Rs 7,500 crore in less than two years.

Wipro, perhaps the weakest of the four, announced a 1:1 bonus last year. It was a way of mollifying shareholders for weak performance over several years.

Clearly, the companies have suddenly woken up to the fact that hoarding cash on the balance-sheet is not a sign of good management. The logic is simple: since cash with the company does not earn any more than what it would in the hands of the average shareholder (whether it is invested in fixed deposits or mutual funds or bonds), handing over the excess cash that is not required for business expansion or acquisition to shareholders is a good idea.

There are, of course, several other reasons for cash-rich companies to lower their hoards.

First, cash on the balance-sheet lowers the return on net worth (RONW) to shareholders. This is a clear turn-off for investors. The managements have realised that displaying hoards of cash is not good enough anymore.

Second, the trigger for such huge shifts in payout policies probably came from shareholder activism in the US, where hedge fund Elliott Management forced Cognizant to fork out $3.2 billion in cash through buybacks and dividends over two years starting 2017. The India-listed companies got the message quickly and took pre-emptive action to ward off investor activism. While a TCS or Wipro or HCL Tech may be safe from raiders, Infosys is not. Too much cash invites greenmail by corporate raiders.

Third, having too much cash in the bank is a form of risk-aversion – which is not what company managements are paid huge salaries for. They are expected to take good risks, and keep improving and expanding the business, not earn income from sitting on their butts.

Excess cash on the balance-sheet is often a signal that the management does not have good growth ideas, or that the business is about to stagnate. In the late 1990s and the Noughties, Bajaj Auto was sitting on loads of cash even as its market share in two-wheelers was being whittled down by Hero Honda, and it was about to lose its No 1 slot in India. It was only when the company started investing again in new designs and new technology, buying stakes in global firms (like KTM) and building new partnerships upmarket (with Triumph, for example), that it regained its old mojo. But it probably still has too much cash on its balance-sheet.

India’s IT companies have learnt the hard way that too much cash is a sign of business weakness, not strength.