Dividend payout by information technology (IT) services firms in the ongoing financial year is likely to witness a dip as compared to previous years, as companies are aggressively looking at conserving cash to tide over Covid-induced slowdown.
Possible decline in free cash flow because of fall in net profit, additional expenses due to the Covid-19 pandemic, and cash conservation for prospective acquisitions are seen as key factors for this likely scenario.
“Dividend policy will have to undergo a change this financial year. This is mainly because companies are expected to keep cash for acquisitions to generate growth to beat the negative growth that the industry is likely to clock on organic basis,” said V Balakrishnan, chairman of Exfinity Venture Partners, who is also a former CFO and board member at Infosys.
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IT services firms usually return their surplus cash to their shareholders in the form of interim and annual dividends apart from conducting buybacks on regular intervals. As one of the cash-rich industries, investors take long-term bet on the IT stocks due to regular dividend payout along with appreciation in share prices. However, last financial year has already seen a cut in dividend payout by companies, except for market leader Tata Consultancy Services (TCS), owing to slowdown in demand.
In financial year 2019-20, TCS returned Rs 31,895 crore to shareholders as dividend payout, which was 108.9 per cent of the company’s free cash flow. In FY19, the dividend payout ratio was 110.2 per cent, while it was 106 per cent in FY18.
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The country’s second largest IT services firm Infosys’ payout ratio with respect to the free cash flow in FY20 was at 53.5 per cent as compared to 68.1 per cent in FY19 and 69.8 per cent in FY18. For Wipro, dividend payout ratio to net income stood at 60.7 per cent during FY17-FY19 period.
“With the sole exception of TCS, tier-I companies have lowered their payout ratio in FY20 versus FY19 (including buybacks). The pandemic is likely to impact the payout ratios in the current year as well, considering IT firms may conserve cash to take care of additional expenses apart from exploring opportunity for acquisitions,” said Sanjeev Hota, head of research at brokerage firm Sharekhan.
In a recent report, Kotak Institutional Equities said the payout in FY20 was disappointing given the strong cash flow generations with little capital expenditure.
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“While Infosys paid out only 55 per cent of free cash flow of FY20, HCL Technologies’ dividend payout has disappointed us at around 20 per cent of net profit. Tech Mahindra’s payout could also have been better. TCS is the only exception with a strong dividend payout,” the report said.
Sources in the know said this trend is likely to continue in FY21 as well, as firms take into account their own priorities before deciding upon the capital allocation policies.
“While Tech Mahindra will have to consider the pressure on operating margins before deciding up on payouts this financial year, Wipro’s management changes are likely to have an impact on its capital allocation policy. Similarly, HCL Technologies’ obligations to pay IBM for its recent IP buyout will have considerable influence on its dividend distribution decision this fiscal,” said another Mumbai-based market analyst.
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According to experts, while companies are likely to have a relook at their cash conservation moves, there will be no changes in their stated stance in capital allocation strategies.
“Most IT firms will not change their capital allocation policies but will tweak it for this financial year given the Covid-19 pandemic. As the current crisis gives an opportunity to IT firms to go for mergers and acquisitions, holding on to cash seems natural,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.
Possible decline in free cash flow because of fall in net profit, additional expenses due to the Covid-19 pandemic, and cash conservation for prospective acquisitions are seen as key factors for this likely scenario.
“Dividend policy will have to undergo a change this financial year. This is mainly because companies are expected to keep cash for acquisitions to generate growth to beat the negative growth that the industry is likely to clock on organic basis,” said V Balakrishnan, chairman of Exfinity Venture Partners, who is also a former CFO and board member at Infosys.
ALSO READ: Coronavirus LIVE: 7,419 cured in last 24 hours; recovery rate now 51.08%
IT services firms usually return their surplus cash to their shareholders in the form of interim and annual dividends apart from conducting buybacks on regular intervals. As one of the cash-rich industries, investors take long-term bet on the IT stocks due to regular dividend payout along with appreciation in share prices. However, last financial year has already seen a cut in dividend payout by companies, except for market leader Tata Consultancy Services (TCS), owing to slowdown in demand.
In financial year 2019-20, TCS returned Rs 31,895 crore to shareholders as dividend payout, which was 108.9 per cent of the company’s free cash flow. In FY19, the dividend payout ratio was 110.2 per cent, while it was 106 per cent in FY18.
chart
The country’s second largest IT services firm Infosys’ payout ratio with respect to the free cash flow in FY20 was at 53.5 per cent as compared to 68.1 per cent in FY19 and 69.8 per cent in FY18. For Wipro, dividend payout ratio to net income stood at 60.7 per cent during FY17-FY19 period.
“With the sole exception of TCS, tier-I companies have lowered their payout ratio in FY20 versus FY19 (including buybacks). The pandemic is likely to impact the payout ratios in the current year as well, considering IT firms may conserve cash to take care of additional expenses apart from exploring opportunity for acquisitions,” said Sanjeev Hota, head of research at brokerage firm Sharekhan.
In a recent report, Kotak Institutional Equities said the payout in FY20 was disappointing given the strong cash flow generations with little capital expenditure.
ALSO READ: India May exports fall 36.47% to $19.05 bn, trade deficit down to $3.15 bn
“While Infosys paid out only 55 per cent of free cash flow of FY20, HCL Technologies’ dividend payout has disappointed us at around 20 per cent of net profit. Tech Mahindra’s payout could also have been better. TCS is the only exception with a strong dividend payout,” the report said.
Sources in the know said this trend is likely to continue in FY21 as well, as firms take into account their own priorities before deciding upon the capital allocation policies.
“While Tech Mahindra will have to consider the pressure on operating margins before deciding up on payouts this financial year, Wipro’s management changes are likely to have an impact on its capital allocation policy. Similarly, HCL Technologies’ obligations to pay IBM for its recent IP buyout will have considerable influence on its dividend distribution decision this fiscal,” said another Mumbai-based market analyst.
ALSO READ: Lenders to seek bids for troubled Asian Colour Coated Ispat again
According to experts, while companies are likely to have a relook at their cash conservation moves, there will be no changes in their stated stance in capital allocation strategies.
“Most IT firms will not change their capital allocation policies but will tweak it for this financial year given the Covid-19 pandemic. As the current crisis gives an opportunity to IT firms to go for mergers and acquisitions, holding on to cash seems natural,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.
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