Cognizant triggers share buyback trend among IT giants

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52489173 - stock market background design
52489173 – stock market background design

On 9 February, 2017, Cognizant announced that it would buyback its shares, amounting to $3.4 billion, so as to provide returns to shareholders. The decision came after extended talks with investor Elliott Management Corp, whose stake in Cognizant is more than 4%. They demanded that the company take steps to improve shareholder value and as a part of the deal Cognizant agreed to return the $3.4 billion over two years.

This buyback has triggered a new trend where giants of the IT industry, like Infosys and TCS, are also considering a similar step. TCS has already filed a brief with the BSE in which they informed the BSE that the board of TCS will discuss a buyback of shares in a meeting scheduled for 20 Feb, 2017. The company has 9% of its market capitalisation, Rs.43,100 crore, available according to the company accounts.

According to Urmil Shah of IDBI Capital Markets and Securities, TCS can buyback up to Rs.20,900 crore worth of shares, which constitutes 25% of the company’s net worth. She also said according to her, a buyback of up to Rs.13,600 crore ($2 billion) would be a prudent move to make. She also said that they were recommending a ‘hold’ on TCS share at a price of Rs 2,202 per share.

Meanwhile, at Infosys, former CFO, V Balakrishnan, has demanded that the company consider a buyback in order to protect the interest of the shareholders. There were even reports that the company’s board would be meeting to consider a buyback of up to Rs.12,000 crore. However, The Economic Times reported that Infosys has responded to the reports and stated that it will not comment on such rumours and that it will continue to honour its obligations to Listing Obligations and Disclosure Requirements.

These announcements have sparked a debate where some believe a buyback to be a good idea while others are not in favour of it. Sandeep Tandon, the MD and CEO of Quant Broking, has welcomed the move by Cognizant and TCS. He considers it a step in the right direction to improve earnings per share.

On the other hand, Rajeev Dubey, the Managing Editor of Business Today, has said that it would not be a smart move. He has also said that giving into investor pressure and buying back shares could indicate a lack of faith in the future of the IT industry. He said that these moves will not help improve earnings per share because the dividend payouts of the companies in question have been good and their shares are already at a point between a 52 week high and a 52 week low.

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