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.
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.
“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.
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.