TCS could raise Tata Sons dividends by a third by FY25

BENGALERU : Tata Sons Ltd’s reliance on Tata Consultancy Services Ltd (TCS) to fund the group’s planned $18 billion annual capital expenditure is set to increase over the next five years as the largest company’s dividend income of the country’s technology services are expected to grow by a third by 2025 thanks to improved free cash flow.

Return of the TCS 38,010 crores to shareholders in dividends and share buybacks during the financial year ended March 31, 2022, more than the 39,150 crore generated in free cash flow. Net of tax, Tata Sons, which held 72.30% of TCS, obtained 20,772 crores or approximately 86% of holding company assets 24,133 crore revenue.

Faster growth and better deployment of working capital at TCS will mean that its free cash flow will be 51,227 crores in the year ended March 2025, estimates Pankaj Kapoor, an analyst at CLSA, the brokerage.

If TCS maintains its current policy of returning 102.8% of free cash flow through dividends and buybacks, Tata Sons’ revenues from TCS will increase to approximately 28,900 crore by March 2025, according to analysis by Mint.

“We believe TCS’ ability to structure large transactions at cost should help it gain market share in a challenging operating environment,” CLSA’s Kapoor wrote in a note dated Sept. 14.

TCS contributed 91% of Tata Sons 19,598 crore in revenue in March 2021. A rise in commodity prices has helped Tata Steel return more cash to its parent company and reduce reliance on the technology services company.

But a correction in steel prices in the current year means that Tata Steel will have less money to return to shareholders in the current financial year.

Simply put, TCS, which currently funds one-sixth of the group’s spending, will fund one-third of the $18 billion capital expenditure by 2025.

That should ease investor concerns as the Tata Group has outlined an ambitious plan to spend $70 billion in the country over the next five years, making it the biggest bet of a private conglomerate, according to The Economist.

Besides a $10 billion plan by Tata Power to turn to renewable energy, $5 billion in building gigafactories and another $5 billion in building a semiconductor manufacturing plant, Tata Sons did not disclose details of the $90 billion spending.

“The chairman has already stressed that some big companies like Tata Steel will not need a further cash injection from Tata Sons. Now the focus is on scaling up Tata Digital and creating new businesses in areas such as establishing the semiconductor factory. Dividend income from TCS will help create these new businesses,” said a TCS executive, speaking on condition of anonymity.

An email sent to a Tata Sons spokesperson went unanswered.

Since Natarajan Chandrasekaran took over as chairman of Tata Sons in February 2017, he has enlisted a few of his lieutenants from TCS and given them key roles in other group companies.

In 2019, Pratik Pal, the former Head of Retail Business Segment at TCS, became Head of Tata Digital, while former Head of Corporate Japan Business Amur S. Lakshminarayanan leads Tata Communications . In May, former head of digital business at TCS, Satya Ramaswamy, was appointed chief digital and technology officer of Air India.

Under Chandra, as the president addresses his colleagues, a few of the group’s companies are working together to improve their technological capabilities.

For example, TCS engineers are now working with Tejas Networks to manufacture 5G telecommunications equipment even as TCS chief operating officer N. Ganapathy Subramaniam has taken over the chairmanship of Bengaluru-based Tejas, which was acquired by Tata Sons last year.

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