IT’s Time to Pay Back: Investors Stress on Buyback
IT cos get calls to boost shareholder returns as growth prospects weaken
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.”
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