During the last one-and-a-half decade or so, the Indian I-T [information technology] industry has recorded unprecedented growth propelled mostly by exports. Of this, a disproportionately high share has come from increase in exports to USA.
The industry has an aggregate revenue of over US$ 150 billion [2016] of which around US$ 100 billion [or 2/3rd] is contributed by export and the balance US$ 50 billion from domestic source. Within exports, USA alone accounts for over US$ 50 billion.
This rapid growth helped all leading players viz. Tata Consultancy Services [TCS], Infosys, Wipro, Cognizant Technologies etc reap a financial bonanza. Even after distributing handsome dividends, they have accumulated monuments of cash running in billions of dollars. Of course, India has gained enormously by way of big boost to export earnings, reining in current account deficit and significant improvement in macro-economic fundamentals.
However, the honeymoon period seems to be giving way to challenging times. The unfolding global uncertainties, softness in overall demand for IT services, shift towards digital technologies and Britain’s exit from European Union [EU] does not bode well for the ability of Indian IT services players to sustain the momentum of growth.
Already, there has been a substantial dip in the volume of traditional IT services – a stronghold of Indian companies. All big players viz. TCS, Wipro, Cognizant and Infosys have been impacted severely especially due to decline in demand from clients in the banking and financial services and healthcare, which have thus far been major revenue generators for them.
At the same time, clients are also asking for massive price cuts, expecting Indian firms to pass on benefits from productivity improvement and automation. Though, the latter have witnessed growth from customers in newer areas viz. adoption of automation, cloud computing and digital technologies, this has not been able to offset the loss in traditional segment.
This has prompted National Association of Software and Services Companies [NASSCOM] – an umbrella organization of IT related companies – to revise the IT sector’s growth forecast to 8-10 per cent during 2016-17 down from 10-12 per cent it had projected earlier in April. This is the second time that it has projected single-digit growth in a decade after industry saw its lowest growth of 5 per cent in 2009-10 in the aftermath of the banking meltdown in US.
Though, NASSCOM exudes confidence that the problems are transient and hopes that the sector would be back to high growth trajectory in the next few quarters, the scenario is only going to get grimmer especially in view of challenges from USA. This is mainly in view of President Donald Trump aggressively pursuing his ‘buy American, hire American” agenda.
Even as the President goes about implementing stricter immigration norms and drastically reduce scope for employing foreign skilled personnel by pushing firms to hire more people locally [to serve clients in USA], this will seriously impact their businesses. It will also increase the cost of doing business by leaps and bounds as even Indian professionals working under H1-B and L1 visa will have to be paid almost double of what they are being paid now.
How is the Indian IT industry going to gear itself to meet the challenges ahead? What kind of strategic restructuring is needed to cope with the emerging situation? What sort of intervention or support can the government provide to tide over the looming crisis?
This industry has the capability and resilience to successfully come out of any crisis situation. It demonstrated this when faced with the crisis of 2008-10 – it posted double digit growth in subsequent period. It can successfully navigate even the current difficult terrain albeit with some government support coming by way of a special dispensation from Trump for Indian IT service providers [perhaps, Modi’s may use his charisma in securing this].
The overriding thrust will have to be on strengthening and consolidating in newer areas viz. adoption of automation, cloud computing, data analytics and digital technologies and concurrently, reduce dependence on traditional IT services. This will call for substantial investment in expansion – both organic as well as inorganic. Besides, investment is needed in up-gradation of skills of the workforce and acquiring capabilities in newer platforms and domains.
Already, the leading players have ambitious plans lined up. For instance, Vishal Sikka, the flamboyant CEO of Infosys had laid down a capital allocation strategy to achieve a mammoth revenue target of US$ 20 billion by 2020. Two-third of this was expected to come from organic growth and one-third from acquisition [read inorganic].
However, for reasons best known to the managements, the companies are doing a volte face. Almost all the leading players are currently on a “buyback” spree. Put in plain words, this means that the company purchases outstanding shares from its shareholders and extinguishes them. This helps improve return per share as the number of shares to be serviced decreases. Besides, those who were invested in the company end up making bountiful gain.
While, this may sound attractive to both the company and shareholders, but it inflicts a huge cost on the former in the medium to long-term. To the extent cash is returned to shareholders, it will have less resources available to fund investment in expansion, diversification of portfolio and growth. For instance, in case of Infosys, buyback option will shave off 50% of its cash reserves of US$ 5 billion.
This is a retrograde move especially at this juncture when they need massive investment in value addition and for operating in hitherto unchartered territories [cloud computing, digital technologies etc] for sustaining the growth momentum. In the cited case, it will be impossible to achieve the revenue target of US$ 20 billion by 2020. Other companies will be affected likewise.
The IT czars of India would do well to change course lest they end up getting knocked down by impending shocks.