After years of sitting on piles of cash, Indian information technology (IT) services firms are suddenly dispensing some of it to their shareholders by way of buybacks. In mid-February, Tata Consultancy Services (TCS), India’s largest IT services firm, which has a cash pile of around Rs.40,000 crore ($6 billion), announced that it would buy back equity shares worth up to Rs.16,000 crore ($2.4 billion). This is TCS’ first buyback scheme since it went public 13 years ago and also the biggest share repurchase program in the country. (A few weeks before TCS’ announcement, Nasdaq-listed Cognizant Technology Solutions, which has the bulk of its workforce in India, declared a dividend payout and a share buyback of $3.4 billion.) In March, HCL Technologies said it would buy back Rs.3,500 crore ($340 million) of shares. Others like Wipro and Tech Mahindra are expected to follow suit. On April 13, announcing its results for the fourth quarter of fiscal 2017, Infosys said that up to Rs. 13,000 crore ($2 billion) is expected to be paid out to shareholders during 2018 in dividends, share buybacks or both. In addition, the company expects to pay out up to 70% of free cash flow next year in the same combination. Currently, Infosys pays out up to 50% of post-tax profits in dividends.
The buybacks are a move to boost share price and soothe investor sentiments. They are also designed to make them less attractive to predators. After years of giving high returns, the industry has been delivering below expectations; most Indian IT services firms have been performing below the Sensex, the benchmark stock index. Recent developments like U.S. President Donald Trump’s election and the ensuing controversy surrounding outsourcing and H1-B visas, and technology disruptions caused by digital transformation and automation are in fact threatening the very fundamentals of the $108 billion IT-BPO exports industry. That industry put India on the world map because of its high-quality, low-cost tech talent and a successfully executed offshore-global delivery model. (Indian IT firms use the H-1B temporary work visas in large numbers to fly their engineers to client sites in the U.S., which is their largest market accounting for over 60% of exports.) There are also pressures from other quarters, such as Brexit and the consequent delays in decision making; slowdowns in the banking and financial services sector, and reduced discretionary IT spending.
The projections of industry body Nasscom (National Association of Software and Services Companies) mirrors the growing uncertainly. In sharp contrast to the heady growth of over 30% of previous years and in line with dipping growth in recent times, at the beginning of fiscal year (FY) April 2016-March 2017, Nasscom had forecast a growth of 10% to 12% (in constant currency terms). In November last year, it lowered the outlook to 8% to 10%. In February, for the first time in 25 years, Nasscom deferred giving the annual revenue outlook for fiscal 2018 by a quarter.
Other projections, too, are bleak. A few weeks ago, Goldman Sachs said that the revenues of the top five Indian IT services firms are likely to grow at a compound annual growth rate (CAGR) of 8% as compared to 11% during the FY 2011 to FY 2016 period. The U.S.–based Deep Dive/Everest Group IT services forecaster expects a 6.3% growth for the top five IT companies for calendar year 2017. For the industry as a whole (excluding multinational captive centers), the growth in 2017 is projected to be a mere 5.3%.
“For several years now, experts have been predicting that the dream run of the Indian IT services industry will soon be over. By all indications, that time has actually dawned now,” says Rishikesha T. Krishnan, director of the Indian Institute of Management Indore.
But this is not the first time that the industry is looking down a long dark tunnel. The Asian Crisis of 1997, the dot-com bubble burst of 2001 and the economic crisis of 2008 were all trying times. Each time, the industry managed to bounce back. So what is different this time around?
Lacking Strategic Relevance
Ravi Aron, professor of information systems at the Johns Hopkins Carey Business School, says Indian companies are struggling with a problem of strategic relevance. “The current protectionist regime in the U.S. and the anti-trade mood will result in legislations that may cause some temporary but not very large setbacks. The real problem for India IT services companies is that they occupy positions of very low strategic relevance with their clients.”
“For several years now, experts have been predicting that the dream run of the Indian IT services industry will soon be over. By all indications, that time has actually dawned now.” –Rishikesha Krishnan
Aron points out that several emerging technologies are changing how companies compete, the way they engage with customers and even the nature of work inside the firm. Big Data and analytics, artificial intelligence and robotics are all top of the mind not just for CTOs in corporations but also for all CXOs. “When we [business school faculty] talk to senior executives, they do not ask us to explain the difference between supervised and unsupervised learning in machine learning. Instead, they ask specific questions about how will machine learning have an impact on predicting customer response to products in retail financial services? Or, how can data mining be used to identify opportunities in new product development by analyzing and classifying patterns from transaction data?”
But Indian IT companies are operating on a different model altogether. They expect the clients to tell them what they want from these emergent paradigms and offer to find out a cost effective way of doing it. “They are not ready to deal with the ‘what aspects of business can I transform with technology’ question, which is of high strategic relevance,” says Aron.
Saikat Chaudhuri, executive director of Wharton’s Mack Institute for Innovation Management, adds: “Essentially, Indian IT firms have been stuck in the middle; they are not low-end providers anymore with low costs, neither have they been able to propel themselves to become high-end providers performing core work and high-margin services. At the same time, on the technology side, automation threatens to render obsolete much of the labor arbitrage work on the lower end; while political changes such as protectionism compound the problem.”
Keeping pace with technology and the changing requirements of clients is the most difficult challenge that the Indian IT industry is facing today, says D.D. Mishra, research director at IT research and advisory firm Gartner. Pointing out that the current situation is “very unique and we are possibly going through the most interesting phase of evolution in terms of IT services,” Mishra lists his key concerns: “We see that creative destruction has become a norm for many businesses. Re-skilling people is a big challenge, especially when you have a large workforce. The short supply of skilled labor will be one big inhibitor. Endpoints of the Internet of Things will grow at a CAGR of 32.9% from 2015 through 2020, reaching an installed base of 20.4 billion units. This will drive a lot changes in the business models and business opportunities which need to be tapped. And