IT’s Time to Pay Back: In­vestors Stress on Buy­back

IT cos get calls to boost share­holder re­turns as growth prospects weaken

The Economic Times - - Front Page - Jochelle.Men­donca @times­

Ben­galuru: In­dian out­sourc­ing com­pa­nies are be­set with ris­ing de­mands from in­vestors for a buy­back of shares even as they grap­ple with slow­ing growth and the spec­tre of ris­ing pro­tec­tion­ism in the United States — their largest mar­ket.

In­spired by the de­mand last Novem­ber by hedge fund El­liott Man­age­ment for an in­crease in share buy­backs at Cognizant, both do­mes­tic and for­eign in­sti­tu­tional in­vestors are seek­ing sim­i­lar ac­tion from other in­for­ma­tion tech­nol­ogy ser­vices com­pa­nies, ac­cord­ing to se­nior ex­ec­u­tives.

“After the El­liott let­ter, we also got some ques­tions about this, es­pe­cially be­cause the sec­tor is not grow­ing as fast as it was,” said Milind Kulka­rni, chief fi­nan­cial of­fi­cer at Tech Mahin­dra after the com­pany’s thirdquar­ter re­sults last week.

“But this is some­thing our board will have to take a de­ci­sion on,” he said.

The out­sourc­ing in­dus­try has seen a steady dip in growth in re­cent times. The Na­tional As­so­ci­a­tion of Soft­ware and Ser­vices Com­pa­nies (Nass­com) has cut the in­dus­try’s growth tar­get for fis­cal 2017 to 8-10% from 10-12% for the same year. Com­pa­nies such as Cognizant (as of De­cem­ber 31, 2016) ($ Bil­lion) and In­fosys have cut their growth tar­gets while Mindtree has warned of slower growth. An­a­lysts have also cut their price tar­gets for IT stocks to fac­tor in the tougher busi­ness en­vi­ron­ment.

In his let­ter ad­dressed to the Cognizant board and CEO Jesse Cohn, El­liott’s se­nior port­fo­lio man­ager sug­gested that the IT ser­vices com­pany should “im­me­di­ately in­sti­tute a long-term cap­i­tal re­turn pro­gram with a com­mit­ment to re­turn 75% of US free cash flow to share­hold­ers.”

“Be­ing a to­tal bev­er­age com­pany that plays in en­hanced hy­dra­tion, pack­aged water, juice and sparkling cat­e­gories, we recog­nise that there is need for us to do a lot more to be­come the bev­er­age of con­sumer’s choice for all oc­ca­sions,” the Coca-Cola spokesper­son said.

Pep­siCo de­clined to re­spond di­rectly to a query about teams be­ing set up to mon­i­tor re­gional brands and said it is step­ping up cus­tomer en­gage­ment. “We have sharp­ened our com­mu­ni­ca­tion based on in­sights we glean from con­sumer in­ter­ac­tions,” Vipul Prakash, VP for bev­er­ages at Pep­siCo, said in re­sponse to an ET query. “We have also con­nected dig­i­tally with con­sumers with pur­pose-led advertising and rel­e­vant dig­i­tal ini­tia­tives.”

There is spec­u­la­tion that lo­cal brands in Tamil Nadu have fu­elled the up­com­ing boy­cott of co­las in the state. A sec­tion of Tamil Nadu traders has de­cided not to sell Coca-Cola and Pep­siCo prod­ucts start­ing March 1, al­leg­ing that the com­pa­nies were ex­ploit­ing the state’s water bod­ies to make aer­ated drinks while farm­ers faced se­vere drought. The curbs could im­pact as much as .₹ 1,400 crore in an­nual sales for Coca-Cola and Pep­siCo. A spokesper­son for Kali Aer­ated Water Works, the maker of Bovonto soft drinks, did not im­me­di­ately re­spond to an email query from ET.


Some of the in­dige­nous soft drinks have been around even be­fore In­dia’s In­de­pen­dence. Bovonto was in­tro­duced in 1959. Sosyo was launched in 1923 and its key mar­kets in­clude Ma­ha­rash­tra, Ra­jasthan and Mad­hya Pradesh.

The Coca-Cola spokesper­son added: “In­dia is one of the low­est-pen­e­trated and low­est per capita mar­ket for pack­aged bev­er­ages and there is plenty of room for all play­ers to grow. Cur­rently, less than 200 mil­lion In­di­ans con­sume pack­aged bev­er­ages and the per capita con­sump­tion of soft drinks is less than 20. The in­dus­try has a long way to go.”

Cash & Cash Equiv­a­lents and In­vest­ments

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