TCS Share Buy-Back Lacks Strategy, Tatas Should Spend on Disruptive Technologies

The buy-back is also not well-timed, writes Madhavan Narayanan.

While Rs 18,000 crore may not be a big amount for a company that has a market capitalisation of Rs 14.4 lakh crore, it is precisely for that reason that investors may not be impressed.

(Photo: PTI)

On the face of it, share buy-backs are a way of increasing shareholder value for cash-rich companies. But playing this like a rule of thumb can be an unwise decision, and it appears that the latest buy-back announced by information technology leader Tata Consultancy Services (TCS) falls in that category.

While Rs 18,000 crore may not be a big amount for a company that has a market capitalisation of Rs 14.4 lakh crore, it is precisely for that reason that investors may not be impressed. By its own admission, TCS would be denting its equity capital by just 1.08 percent. This would barely have an effect on the earning-per-share of the company.

Buy-Back Not Well-Timed

The proposed buy-back price at Rs 4,500 appears like a handsome mark-up of 15 percent from the stock's current levels but it is pertinent to ask if – in a market in which it has outperformed its peers amid a strong recovery in the US markets – this push was necessary at all. Some brokerages had already given target prices of Rs 4,200 to Rs 4,500 for TCS a quarter ago when the numbers ahead were less visible.

The buy-back is also not well-timed. Buy-backs are better done in a bear market where shareholders need to be rewarded for staying on. We are now in a low-interest Goldilocks sort of a market in which a whiff of buy-back would hardly make anyone sit up.

The real issue, however, is deeper than all that.

It is possible to argue that the amount the Tatas spend on the planned buy-back would be better spent strategically for the good of both the group and its shareholders because the context in which TCS is functioning is a time of unprecedented technological disruption worldwide, in which investments linked to emerging fields would be a much better way of spending the cash that is headed towards the buy-back.

Only a quarter ago, TCS's chief financial officer Samir Seksaria had said that the company would continue its investments "as per business requirements."

Now, most of TCS's current subsidiaries are essentially there to ensure geographical spread as the company expands its footprint as a global player. But what it really needs now is a global footprint – not of a geographical kind, but the technological variety.

TCS Needs To Keep an Eye on Both Threats and Opportunities

Last year, TCS announced it would invest Rs 690 crore in an "innovation park" in Kerala. On closer examination, it turns out to be a real estate project in collaboration with the state government.

Is that the real deal? Is this a "business requirement" as defined by CFO Seksaria? I should think not.

Just take a deep breath and look at the emerging upheaval technologies listed by respected site Big Think.

Apart from better known or heard trends such as artificial intelligence, augmented/virtual reality, the Internet of Things, and blockchain, there are fields such as "serverless computing," quantum computing, and biometrics in the list.

To these, we might add areas such as electric mobility, futuristic entertainment, and renewable energy in which the Tatas already have in-house presence through companies like Tata Technologies, Tata Motors, Tata Elxsi, and Tata Power. Space exploration is another area.

While the Tatas, no doubt, have an eye on some and a finger in some of these technologies, the potential (for both opportunities and threats) from these emerging technologies is so huge that strategic minority stakes in startups or smaller listed companies in these areas would create much better long-term value for TCS shareholders than an iffy buyback.

As a strategic service provider to global giants, TCS needs to keep an eye on both threats and opportunities in a competitive field.

Investments in new-age companies can offer low-cost due diligence for the Tatas, alliances for a go-to-market strategy, service partnerships, acquisition targets, and the likely upside of a huge capital gain when billion-dollar-valuation unicorns or more emerge out of strategic investments.

There's an in-house precedent for the Tatas in this. The Tatas invested $677 million in August 2006 in Energy Brands Inc, a health-drink maker for a 30 percent stake. They sold it to Coca-Cola Company barely a year later for $1.2 billion, and that was a profit of more than $500 million!

Now, Tata Sons, the holding company of the group, has a 72 percent stake in TCS. Even if the Rs 18,000 crore being spent on the buyback was given away as a dividend, Tata Sons would receive from TCS a cash pile of about Rs 13,000 crore.

Tata Sons has been buying significant stakes in companies such as Big Basket and 1mg that are in the predictable business of using new, but well-developed, Internet technologies to serve the Indian market. If the Rs 13,000 it receives from TCS is spent on new-age companies, it may be a wiser thing to do.

The fact is that TCS has vast exposure and experience across industries and technologies. This is mighty intellectual capital. A small amount of financial capital strategically deployed by using the company's strong internal talent would be generating a story that shareholders would love to take a long-term bet on.

(The author is a senior journalist and commentator. He tweets as @madversity.)