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Sensex Cuts Losses; TCS Up 3%
Fri, 15 Jun Closing

After opening the day in red, share markets in India witnessed volatile trading activity throughout the day but clawed back some gains in the final hours of the trading window. Sectoral indices traded on a mixed note, with stocks in the pharma sector and stocks in the IT sector, leading the gains.

At the closing bell, the BSE Sensex stood higher by 22 points (up 0.1%) and the NSE Nifty closed up by 10 points (up 0.1%). The BSE Mid Cap index ended the day down 0.4%, while the BSE Small Cap index ended the day up by 0.5%.

The rupee was trading at Rs 68.01 against the US$ in the afternoon session. Oil prices were trading at US$ 75.03 at the time of writing.

Asian stock markets finished in mixed. As of the most recent closing prices, the Hang Seng was down by 0.4% and the Shanghai Composite was down by 0.7%. The Nikkei 225 was up by 0.5%. Meanwhile, European markets, too were trading mixed. The FTSE 100 was down by 0.7%, The DAX, was up 0.1% while the CAC 40 was up by 0.3%

Moving on to news from stocks in the IT sector. TCS share price is in focus today after the country's largest software services firm approved a Rs 160 billion share buyback plan, in an attempt to distribute available cash among its shareholders.

TCS will buy back 76.1 million shares at the price of Rs 2,100 per share. This makes up about 2% of the total paid-up equity share capital of the company.

Just last year, the company had undertaken a similar Rs 160 billion mega-buyback offer, with Tata Sons tendering 36 million shares accounting for over 64% of the total shares bought back by the company.

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Notably, in the last financial year, TCS returned over Rs 268 billion back to shareholders through dividend and buyback.

Indian IT companies have been under pressure to return excess cash on their books to shareholders through generous dividends and buybacks. Many IT firms, including Infosys (Rs 130 billion) and HCL Technologies (Rs 35 billion) had undertaken buyback schemes last year.

A rising market like this one is an excellent opportunity to raise primary capital as most investors get carried away by the market euphoria and IPO hype, which makes them more likely to overlook the underlying fundamentals of the companies offering shares.

In the last fiscal, India Inc extinguished shares worth nearly Rs 235 billion through twenty buybacks - 2.3 times more than the Rs 100 billion raised by way of initial public offerings. Similarly, in the last financial year, companies repurchased shares worth Rs 340 billion through 49 buybacks while 25 IPOs had raised Rs 282 billion cumulatively.

Notably, in the last two years, buybacks have gained currency as a tool to reward shareholders after the government imposed an additional 10% tax on dividends.

Any dividend received in excess of Rs 1 million is now taxable at a rate of 10% in the hands of the recipient. This is in addition to the Dividend Distribution Tax (DDT) already levied on the company.

The measure - aimed at those receiving significant amounts of dividends - did not go down well with India Inc. Rather than pay dividends, many companies opted to use their surplus cash on share buybacks, which carry no such levy.

With multiple IPO offers lined up, it will be interesting to see if the trend of more buybacks than IPOs continues.

TCS share price ended the day up by 3%.

Moving on to news from stocks in the telecom sector. Idea Cellular share price was in focus today after it was reported that the Department of Telecom (DoT) will approve the proposed Idea-Vodafone merger only after a bank guarantee worth Rs 21 billion from Idea.

Reportedly, the DoT insists on a Rs 21 billion bank guarantee from Idea Cellular towards one-time spectrum charges, as a precondition to approve its merger with Vodafone India.

While the two companies have several unpaid dues, which are being challenged, DoT's guidelines on mergers and acquisitions (M&A) empowers the department to insist on payment of one-time spectrum charges by the transferee company-in this case Idea Cellular.

Notably, Vodafone India and Idea Cellular merger is set to create India's largest telecom operator, surpassing Bharti Airtel Ltd. The top operator will have a revenue market share of around 37% and over 433 million subscribers.

The two companies are set to start operating as one entity from July 1 and for that to happen, the merger proceedings must be completed this month. Idea has called an extraordinary general meeting on June 26 to consider the proposals, including changing the name of the merged entity and raising funds of Rs 150 billion through debentures.

It will be interesting to track the progress of the new telecom leader, and whether it can sustain the pole position, in the hyper-competitive telecom industry.

Note that the whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

With the entry of Reliance Jio, the competition has intensified further, with a lot of the current players opting for consolidation in order to remain competitive. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector.

The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Idea Cellular share price ended the day down by 3.4%.

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