Tata Sons feels the heat as TCS shrinks dividend for the first time in 20 years

Mint

7 days ago

Bengaluru: Tata Sons received less money from Tata Consultancy Services Ltd in 2024-25 than in the year before, a first year-over-year decline since India's largest information technology services company went public in August 2004.
TCS had accounted for about 84% of the Tata Group holding company's total income in 2023-24.
Tata Sons earned ₹1,333 crore less in FY25 dividend income from TCS at a time when it needs more money to bankroll its group companies' new but loss-making businesses, including assembling iPhones for Apple Inc. (Tata Electronics Pvt. Ltd), running Air India, and building an e-commerce business under Tata Digital Ltd.
TCS returned ₹45,588 crore to shareholders in FY25, representing a 4% decline from the ₹47,445 crore it distributed to shareholders in FY24, according to the company's annual report released on Wednesday. As Tata Sons owns 71.77% of TCS, it received ₹32,718.6 crore as dividend income for FY25, down from ₹34,051.27 crore for FY24.
TCS's shareholder payout ratio as a percentage of total free cash flow in FY25 totalled 93.9%—the lowest since FY19, when it was 92.6%. In FY24, the ratio was 101.8%.
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Mint could not Independently ascertain the reason behind TCS distributing less money to its shareholders in the previous financial year. However, two executives, including a public investor in TCS, said the lower shareholder payout could signal that the Mumbai-headquartered company intends to invest more money in its information technology (IT) services business.
'The management needs to clarify if this decline (shareholder payout) is a one-off or if TCS would pay about 92-95% of free cash flow to shareholders," said the investor on condition of anonymity. 'Long-term investors like us understand that the business needs investments, especially as GenAI (generative artificial intelligence) technologies take centrestage."
TCS did not immediately reply to an email seeking an explanation for the company's decision to return less cash to shareholders.
TCS's relative resiliency
Since going public in 2004, TCS has seen its parent and public shareholders earn more money year after year. The only aberration was when TCS returned ₹10,206 crore to shareholders in FY16 after giving them ₹18,088 crore the previous financial year. This was because TCS had given a special dividend of ₹9,166 crore in FY15 to commemorate 10 years since it went public.
Presently, though, TCS's lower shareholder payout comes as the IT services company faces a challenging environment. TCS's revenue improved 3.8% to $30.18 billion in FY25 while net profit rose 2% to $5.74 billion.
However, for the first time, TCS failed to fulfil its promise of annual salary hikes to its 607,979 employees. TCS offers a wage hike at the start of a fiscal year; however, in April, the company's management, citing macroeconomic uncertainty, said it would decide on salary increases later in the year.
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For this reason, some analysts have started voicing concerns.
'TCS managed the 2008-09 recession quite well and gained better market share after the recession compared with peers such as Infosys. We believe relative resiliency versus peers is lower in the current environment," Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S., and Vamshi Krishna said in a note dated 11 April.
'TCS has not been able to outperform Tier 1 peers on revenue growth in the past couple of years, despite the demand environment being more conducive to cost take-outs, TCS' area of strength. Performance in developed markets in FY2025 has been disappointing. Revenue declined 0.2% in developed markets, significantly lower than our estimates for Infosys and HCLT (HCL Technologies), indicating market share losses for TCS," they added.
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TCS: Most generous
Tata Sons has earned ₹1,49,127 crore from TCS in dividends and share buybacks since FY21. It earned an additional ₹9,362.3 crore when it sold 0.65% of TCS shares in March last year—adding up to ₹1,58,489.35 crore ($18.5 billion) in five years.
This inflow of cash from TCS helped Tata Sons pay off over ₹20,000 crore in debt, enabling the Tata Group holding company to start and run new businesses and utilise some of the money in its other listed companies.
Tata Sons owns shares in 26 listed companies, including TCS, Tata Motors Ltd, and Tata Steel Ltd, which cumulatively earned over $165 billion in revenue in FY24. Tata Sons is owned 65.9% by Tata Trusts, 12.87% by half a dozen Tata Group companies, and 18.4% by the Mistry family (of the Shapoorji Pallonji Group).
TCS, despite its lower shareholder payout ratio of 93.9% in FY25, is among the most generous of India's Big Five IT services companies.
Infosys Ltd's capital allocation policy states that the country's second-largest IT services company will return 85% of its free cash flow to shareholders. HCLTech, India's third-largest IT services firm, has promised to return 75% of its profits to shareholders, while Wipro Ltd has assured investors of 50% of its earnings. Tech Mahindra Ltd has announced that it will distribute all its extra cash in dividends.
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