TCS’ dividend income may jump by a third by 2025

Tata Sons’ reliance on Tata Consultancy Services Ltd to bankroll the Group’s planned annual $18 billion capital expenditure is estimated to increase over the next five years as dividend income from the country’s largest technology services company is estimated to jump by a third by 2025 on the back of improving free cash flow. 

TCS returned ₹38,010 crore to shareholders in dividend and share buyback in the year ended March 2022, more than the ₹39,150 crore it generated in free cash flow. Net of taxes, Tata Sons, which owned 72.30% of TCS, got ₹20,772 crore, which was about 86% of the holding company’s ₹24,133 crore in income. 

Better growth and improved working capital deployment at TCS will imply that its free cash flow will be ₹51,227 crore 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 buyback, Tata Sons’ income from TCS will jump to about ₹28,900 crore by March 2025, according to an analysis by Mint.  

“We believe TCS’ ability to structure sole-sourced large, cost-takeout deals should help it gain market share in a tough operating environment,” CLSA’s Kapoor wrote in a note dated 14 September. 

TCS contributed 91% of Tata Sons’ ₹19,598 income in March 2021. A rally in commodity prices helped Tata Steel hand over more money to its parent and cut down the dependence on the technology services firm. 

But a correction in steel prices in the current year implies Tata Steel will have less money to hand over to shareholders in the current financial year. 

Put simply: TCS, which funds a sixth of the Group’s spending for now will finance a third of the $18 billion capital expenditure by 2025.  

This should assuage the concerns of investors 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 by a private conglomerate, according to The Economist. Besides Tata Power’s planned $10 billion investment in renewable energy over the next five years implies Tata Sons’ dependence on TCS will only increase in the coming years. 

According to The Economist, Tata Sons and a few individual companies plan to invest $70 billion in the country over the next five years, making it the biggest bet by a private conglomerate. Besides a $10 billion plan by Tata Power to pivot to renewable energy, $5 billion in building gigafactories and another $5 billion in building a semiconductor fab factory, Tata Sons has not disclosed details of the $90 billion spending. 

“The chairman has already outlined that some large businesses like Tata Steel will not need any fresh cash infusion from Tata Sons. Now the focus is on scaling up Tata Digital and building newer businesses in areas like setting up the semiconductor factory. The dividend income from TCS will help in building these newer businesses,” said an executive at TCS. 

An email sent to a spokesperson at Tata Sons went unanswered. 

Since Natarajan Chandrasekaran took over as the chairman of Tata Sons in February 2017, he has roped in a few of his lieutenants from TCS and entrusted them with key roles at other group companies. In 2019, Pratik Pal, the former head of the retail business segment at TCS, became the head of Tata Digital while the former head of the company’s business in Japan, Amur S Lakshminarayanan, heads Tata Communications. In May, TCS’s former head of digital business Satya Ramaswamy was appointed as the Chief Digital and Technology Officer of Air India.  

Under Chandra, as the chairman is addressed by his colleagues, a few of the group companies are working jointly to improve their tech capabilities. Engineers at TCS are now working with Tejas Networks to make 5G telecoms gear even as TCS’s chief operating officer N Ganapathy Subramaniam took over as chairman of the Bengaluru-headquartered Tejas, which was acquired by Tata Sons last year.