Cognizant Technology Solutions Corp has become the third largest Indian heritage IT services firm — after Tata Consultancy Services Ltd and HCL Technologies Ltd — to dial back shareholder payouts as it redirects capital towards acquisitions and AI capability building.
Nasdaq-listed Cognizant, which follows a January–December financial calendar as against Indian IT’s April–March year, returned $1.99 billion to shareholders through dividends and share repurchases last year.
This year, the company is set to return less.
“This year again, $2.5 billion (in free cash flow), we have committed $1.6 billion to be returned to the shareholder, $1 billion by share buyback and $600 million odd in dividends, of which we have now used about $600 million from the remaining $1 billion for Astreya,” said Jatin Dalal, chief financial officer of Cognizant, during the company’s post-earnings analyst call on 29 April.
Cognizant ended last year with $21.1 billion in revenue, up 7% year-on-year.
“Our long-term capital allocation framework is to deploy ~50% of our annual free cash flow towards M&A aligned with our strategic priorities and ~50% towards dividends and share repurchases, targeting a consistent dividend payout ratio and repurchases to offset dilution. This framework can vary depending on specific market circumstances and opportunities,” said a Cognizant spokesperson in response to Mint's email on 4 May.
Peers follow suit
Cognizant’s shift mirrors that of Tata Consultancy Services Ltd and HCL Technologies Ltd, both of which returned less cash to shareholders last year.
The country’s largest IT services company, TCS, and third-largest HCLTech gave ₹39,571 crore and ₹14,618 crore to shareholders, down 12% and 10% year-on-year, respectively. For Mumbai-based TCS, this marked the second straight year of declining shareholder returns, while for Noida-based HCLTech, it was the first decline in five years.
To be sure, Infosys, Wipro Ltd and Tech Mahindra Ltd moved in the opposite direction, returning ₹36,714 crore, ₹11,578 crore and ₹4,026 crore through dividends and buybacks last fiscal, up 81%, 85% and 5%, respectively.
TCS and Wipro ended last year with $30 billion and $10.48 billion in revenue, down 0.54% and 0.32%, respectively. In contrast, Infosys, HCLTech and Tech Mahindra reported $20.16 billion, $14.66 billion and $6.39 billion in revenue, up 4.57%, 5.95% and 1.9%, respectively.
At least one analyst attributed the shift to the need for growth-led re-rating.
“IT services companies are unable to increase their valuations just by giving excess money to shareholders so they are now focussing on growth. They are not able to increase the value of their shares as much as they expected after the buybacks and high dividend payouts,” said Amit Chandra, vice-president of HDFC Securities.
Over the past year, shares of TCS, Cognizant, Infosys, HCLTech, Wipro and Tech Mahindra have declined 29%, 32%, 22%, 23%, 17% and 2%, respectively. Much of the pressure stems from concerns around automation tools and AI-led efficiencies eating into traditional revenue streams.
Acquisition push
At the core of Cognizant’s reduced payouts is a stepped-up acquisition strategy.
While the company did not spend on acquisitions last year, it deployed $1.62 billion in FY24. It has already spent $730 million since the start of this year and is expected to spend another $600 million.
Cognizant acquired Chicago-based data engineering firm 3Cloud at the start of the year for about $700 million and announced the acquisition of California-based IT services firm Astreya for $600 million.
TCS also stepped up dealmaking, investing ₹6,770 crore on two acquisitions — including ₹6,386 crore ($700 million) on Salesforce consulting firm Coastal Cloud in December, its largest buyout, and ₹612 crore on ListEngage, another Salesforce marketing firm, in October.
In October last year, TCS announced a broader AI pivot, committing $6.5 billion over six years to build 1 gigawatt (GW) of AI data centre capacity.
HCLTech, meanwhile, announced $420 million across four acquisitions last fiscal, its highest in three years, aimed at strengthening AI and data capabilities as clients increase automation adoption.
Cognizant, an Indian heritage IT firm, has now reducing lesser shareholders payouts compared with the preceding years for the third time in five years.
Cognizant, an Indian heritage IT firm with nearly three-fourths of its 357,600 employees based in India, has reduced shareholder payouts for the third time in five years compared with preceding periods.
Execution risk
Management sees a fertile M&A environment ahead.
“This is a phenomenal time to create value from M&A in line with our reforged first principles, which is about having a platform play, managing our business on outcomes versus effort, and AI-enabling our offerings. So if you put all that together, we have some exceptional opportunities in the market,” said Ravi Kumar Singisetti, chief executive of Cognizant, during the analyst call.
Analysts, however, urge caution.
“This points to a more assertive build-and-buy strategy to close capability gaps quickly,” said Phil Fersht, chief executive of HFS Research.
“Cognizant is trying to reposition from a services executor to an AI-enabled transformation partner. The intent is right, but success hinges on how quickly it can convert these investments into differentiated, outcome-based growth,” Fersht added.
“However, the industry conditions are shifting and requiring the firm to make more investments than in the past. These investments take the form of building more IP and moving into adjacent business through acquisitions. Hence the firm is choosing to prioritize the future growth of the firm over returning cash to shareholders,” said Peter Bendor-Samuel, founder of Everest Group.
