Why Infosys, TCS and Wipro should not repeat Cognizant's mistake on share buyback

The IT/ITeS industry works as a herd. First there was Y2K, then verticalisation, then global geographic spread and now it's AI, automation and big data. They've all followed an identical pattern. They even copy each others' organisational structures.

Hence, it wasn't surprising when no sooner had Cognizant announced a $5 billion share buyback and dividend payout that there was a clamour for Indian IT majors TCS, Infosys, Wipro and HCL Technologies to liquidate their cash hoard through a share buyback programme. Shaken by the demand of hedge fund activist investor Elliott Management, the Cognizant board gave in. At least 2 former Infosys CFOs Mohandas Pai and V Balakrishnan have now urged Infosys to buy back its shares.

But India's largest IT/ITeS firms must buck this herd mentality and avoid making the mistake that Cognizant made.

Those propounding buybacks are inevitably admitting these companies have little future beyond IT services. That's a grave mistake. It's a defeatist attitude for companies of this size. A cash pile of $3-4 billion for $15-20 billion revenue companies is peanut butter in today's world of capex and opex.

Instead, Indian IT majors need all the cash to begin a transformative journey from supplying low cost labour to creating radical IT technologies and intellectual property. They need to break the shackles of repetitiveness and mediocrity (something that even killed the great promise that domestic pharma companies once held) and create their own path.

By burying their heads in the businesses of their clients' services, they missed the bus in creating the backbone for India's great e-tail revolution happening in their backyard. Instead, every big e-tailer had to re-invent the wheel and create its own core retailing technology to cater to its growth.

Indian IT majors could neither anticipate nor help create the backbone for the wallets businesses that took off without a warning. More magic is happening in the world of healthcare and education but Indian IT majors are missing in action.

All these were businesses that were right up their street. Alas, they weren't up to it! The problem lies in how they have defined their world view: client servicing. They need to create a wider world view than that. And they need to be persistent with the wider world until it accepts and embraces them. They've consistently failed to anticipate such opportunities. It requires a cultural change, a whole lot of perseverence and loads of cash to invest in people and technologies until they become successful.

Now, let's get to the concept of share buyback itself.

The primary objective of a share buyback programme is to arrest the fall in the value of a stock by reducing the supply of the stock, which essentially pushes up the share price through a better P/E multiple. The other objective is to improve earnings per share (since the same dividend amount is now distributed among fewer shares). This does not apply to any of the Indian IT majors as their stocks are trading somewhere between their 52-week low and 52-week high. Their dividends have been generous and robust and they are still making tactical acquisitions, filling gaps in their portfolio.

By demanding that cash pile be returned to shareholders is akin to putting the cart before the horse. Utilisation of cash pile is a by-product of share buyback programme, not the primary objective. TCS, Infosys, Wipro and HCL Technologies must avoid repeating the mistake that Cognizant made. Their boards need to look at their future prospectively, not retrospectively-as Cognizant did. It's time to define a larger world view and utilise the cash pile for the organisation's and the shareholders' greater good and a brighter future, rather than pander to these myopic demands.