November 25, 2017 3:03 am JST

Indian IT groups turn to buybacks as US headwinds strengthen

Infosys and Wipro follow TCS' lead in giving back to shareholders amid slowing growth

YUJI KURONUMA, Nikkei staff writer

Infosys' headquarters campus (Photo by Yuji Kuronuma)

NEW DELHI -- Two of India's biggest information technology services groups,  Wipro and Infosys, are launching stock-repurchasing programs -- the latter for the first time -- as an industry that has led the rising Indian economy since the 1990s confronts slowing revenue growth.

Wipro plans to spend up to 110 billion rupees ($1.7 billion) to buy back its own shares, while Infosys intends to repurchase a maximum of 130 billion rupees of stock. 

Wipro will repurchase up to 343 million shares, or 7.06% of the company's outstanding shares, for 320 rupees per share, starting Nov. 29. This marks the second and biggest share repurchase by the company, which was founded in 1945. The first, in July 2016, bought back 40 million shares.

Wipro seeks "to return surplus funds to the equity shareholders, which are over and above its ordinary capital requirements and in excess of any current investment plans," the company said in a roughly 70-page outline of the buyback program. "The company does not intend to raise additional debt for the explicit purposes of the buyback," the document states, explaining that the repurchases would be paid for with cash.

Yet the company's balance sheet shows that cash and cash equivalents in the year through March 2017 decreased to 52.7 billion rupees, a third of the level two years earlier and down by half from the previous year. This suggests that the buybacks were not prompted by a rise in idle cash.

Meanwhile, Infosys will start on Nov. 30 buying back a maximum 113 million shares, or 4.92% of its total outstanding shares, for 1,150 rupees each.

In its proposal, the company said the program is aimed "to improve return on equity and earnings per share by reducing the equity base," among other reasons. The company's surplus funds peaked in the year ended March 2016 and have since been on the decline, as is the case with Wipro. Local media reported that Infosys co-founder Narayana Murthy would sell his Infosys shares.

Losing steam

Many market analysts recommend that individual investors sell their shares into the repurchase programs. "Keeping in mind the lower growth outlook for IT companies and protectionist measures by the U.S., investors are better off tendering," says Alok Ranjan, head of research at Way2Wealth Brokers, a brokerage based in Mumbai.

Wipro's stock price rose 9% between July 20, when the company's board of directors adopted the share repurchase plan, and Nov. 23, and has climbed more than 20% this year. Infosys' stock is up 7% from Aug. 19, when the board decided on the buybacks, but the stock price is down 2% this year owing in part to a management reshuffle and other confusion at the top.

Tata Consultancy Services, India's biggest IT company, bought back and retired 2.85% of its outstanding shares in May for a total of 160 billion rupees. As a result, the shareholdings of Tata Sons, Tata Group's holding company, in TCS rose 0.26 percentage point to 73.52%.

Behind these moves lies a leveling off of revenue growth at major Indian IT companies over the past few years. The outlook for the IT industry, one of the country's most vigorous exporters that had posted double-digit growth until recently, has turned cloudy amid structural changes in their business and protectionists rumblings in the U.S., where the Indian groups have earned about half of their sales.

TCS took in $17.5 billion in revenue in the year ended March 2017, followed by Infosys at $10.2 billion and Wipro's IT services segment at $7.7 billion. Their top lines have tripled or quadrupled over the past decade. But while each company racked up 30-40% year-on-year revenue gains every year around a decade ago, growth has since slowed to less than 10%.

One cause of this slowdown is a change in the nature of systems development. Indian IT firms, which are strong in labor-intensive development projects, have catered to corporate customers that need systems tailored to their individual needs. Nowadays, however, corporations are turning to internet-delivered software as a service or cloud applications for their IT needs.

Another difficulty has emerged in the U.S., the biggest market for Indian IT firms. The administration of President Donald Trump has tightened conditions on work visas for Indian engineers. Indian IT companies are coming under greater pressure to hire more American engineers for their U.S. businesses and to invest more in the U.S.

TCS's revenue grew 6% last fiscal year, Infosys' 7% and Wipro's 5%, -- all far below the 11% growth in India's nominal gross domestic product in the same fiscal year. The share-repurchase plans these companies have announced in a quick succession underscore that the IT industry is losing steam as a driver of the Indian economy.

Asia300

Wipro Ltd.

India

Market(Ticker): BOM(507685)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 22,000.02M
Shares: 4,866.69M
Asia300

Infosys Ltd.

India

Market(Ticker): BOM(500209)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 36,670.55M
Shares: 2,296.99M
Asia300

Tata Consultancy Services Ltd.

India

Market(Ticker): BOM(532540)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 76,080.29M
Shares: 1,914.28M

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