India’s IT firms must reduce dependence on North America, think long term

India’s IT services companies are not holding firms. They should focus on creating long-term value for shareholders instead of returning cash to keep share values up.

Graphic by Manali Ghosh | ThePrint

Multiple signals are flashing amber for India’s hugely successful and highly profitable IT services companies. Just a few days ago, US President Donald Trump signed a decree to force these companies to pay $1,00,000 for every H-1B visa they apply for to do onshore work in the US. This will raise costs and reduce labour arbitrage opportunities.

Earlier this month, Infosys, India’s second-largest IT company, announced a Rs 18,000 crore share buyback, the biggest in its history. Some of its peers may also follow suit. When a company chooses to buy back its own shares, it implies one of many things: One, the potential for new business is not as good as before. Two, the share price is trading significantly below its intrinsic value. Three, it wants to increase the earnings per share after a reduction in its outstanding share capital. Four, it would prefer to hand back surplus cash to shareholders than invest it elsewhere. Some promoters may also buy back shares to increase their own proportionate holdings in the company. The most important signal is that the company does not have a better use for its cash. With Infosys announcing a buyback, its peers, Tata Consultancy Services (TCS) among them, may also do the same to maintain investor interest in their shares.

Many of the previous customers of our IT services companies are now choosing to do the job themselves in India through global capability centres (GCCs), where the companies not only retain their intellectual property rights (IPR) in-house, but also indirectly compete for talent and business with Indian companies. This will impact the margins for India’s IT giants — Wipro, Infosys, TCS, Cognizant, and HCL Technologies. India today is the world’s biggest GCC host, being home to more than half of the 3,200 GCCs in the world. More galling, GCCs are growing much faster than our big tech services companies — TCS, Infosys, Wipro, HCL Tech, and Tech Mahindra. In FY24, GCCs grew at 40 per cent while the top 5 Indian IT firms recorded a growth of 5 per cent or less.

TCS, in July, announced that it will shed 12,000 jobs this year, sending shockwaves in the IT industry. It may also do other things to shore up its share prices, which have been stagnating of late.

Building long-term value

While buybacks, high dividend payouts, and layoffs are ways to keep existing investors happy when the news around you is going bad, the big question is whether maximising shareholder returns in the short run is good for these companies, or even India, for that matter.

Do India’s big IT services companies not have better ideas for using their surplus cash than passing them on to shareholders? When there is so much to be done in terms of building products, platforms, and new intellectual property — as opposed to making money on labour arbitrage — why are they just returning so much cash? Can’t a bigger share of the surplus cash not be used to make acquisitions and invest in long-gestation projects like large-language models (LLMs) or small-language models (SLMs) for artificial intelligence? Are shareholders’ long-term interests not better served by investing in such avenues, which may guzzle cash upfront but generate more revenues without a commensurate increase in labour costs in future? Why are the world’s most powerful tech firms (Google, Meta, Microsoft, Oracle) product and platform companies, and not about IT services at all?

Isn’t it time our big services companies pivoted toward creating long-term value for shareholders and stakeholders in general, instead of just doing the easy things like returning cash to keep share values up?

All the big IT services companies in India pay out huge amounts as dividends when they could be less profligate about generating short-term rewards for investors and focus more on building long-term revenue streams. Under Infosys’s dividend/payout policy, it returns 85 per cent of its free cash flows by way of dividends or buybacks. While Infosys pays out two dividends a year, TCS and HCL Tech pay out dividends quarterly. Wipro pays out 70 per cent of net income in every block of three years.

There is, however, a difference between Infosys’ payouts and the other three. Among the four, only Infosys is widely owned, with promoters holding barely about 14 per cent of shares. TCS, Wipro, and HCL Tech are all majority promoter-owned. The promoter holding of TCS and WIPRO is around 72 per cent, and of HCL Tech about 60 per cent. This implies that most of the dividends paid by TCS, Wipro and HCL Tech are pocketed by their promoters. 

In 2024-25, TCS paid out over Rs 32,700 crore to its promoters, money that was often used to invest in other group companies. The other two use their dividend incomes to fund group ventures and non-profits. TCS pays out hefty dividends in order to enable the group to invest in other companies, when in reality, it should be investing more in its own future.

In short, these four IT services giants, which earn the bulk of their profits from labour arbitrage, use their cash surpluses more to reward shareholders and promoters than to build platforms, products, and tech Intellectual Property Rights (IPRs). This — arguably — can be called a bit short-sighted, for in the age of artificial intelligence, labour arbitrage opportunities will soon start slimming down, not least because America is becoming more concerned about shipping jobs offshore. Beyond Trump’s H-1B visa fee hike, there could well be legislation to tax companies for every job sent overseas, though this may not happen if the H-1B cost itself forces services companies to create more jobs onshore in North America, and do less offshoring.

Rethinking strategy

India’s IT services companies should be aggressively rethinking their current strategy of relying too much on North America for business (50-60 per cent). This does not mean denying the opposite reality that labour arbitrage-based services are still huge revenue gushers, delivering margins above 20 per cent for Infosys and TCS, and in the high teens for the other two.

There are five questions our IT majors must ask themselves.

Concentration risk: Are they too dependent on one geography (North America) for their business? How soon can they reduce this dependency and spread the risk?

Too greedy: Are they too margin-focused, and less keen on volume growth?

Labour arbitrage: Are they too dependent on software services in the age of AI and GCCs, when they should increasingly focus on products, platforms, and IPR?

Risk aversion: Can their cash surpluses be used better than to just pay out more dividends or finance buybacks? Shouldn’t they be taking more risks by investing in cutting-edge IPR and acquisitions, or is risk-aversion a big part of their DNA?

Short-termism: Are they trying to create long-term shareholder value, or short-term?

If you were to ask the world’s most famous investor, Warren Buffett, his holding company Berkshire Hathaway simply does not believe in paying out dividends. It may, at best, do some buybacks, when the gap between the share’s intrinsic value and market prices is simply too large to be ignored. Buffett believes that investing in high-growth businesses delivers much better value in terms of shareholder returns than paying out dividends, and his share price performance tells us as much. Over a long period of time, Berkshire Hathaway has outperformed almost all indices by a wide margin. 

To be sure, India’s software services companies are operating companies and not holding firms, but the broad principle applies: they may be better off investing a larger portion of their cash surpluses in businesses involved in products, products and IPR, and not just in labour arbitrage. 

In the case of the four IT giants, where three of them are promoter-led, the case for high dividend payouts and expensive buyouts is weaker than for Infosys, which has a massive investor base to keep in good humour. Even in the case of Infosys, maintaining a high share price is not critical since it does not need fresh money to be raised at good valuations. Maybe it is time to up spending on creating IPR, products and platforms, even if some of it has to be acquired.

Their inspiration should be Warren Buffett, not faceless shareholders, including institutional ones like foreign portfolio investors and domestic mutual funds. They must think more long-term than they are doing now.

Also, they might do well to remember the 2019 statement of the US Business Roundtable on defining the purpose of the corporation. It said that the purpose of any company is not just increasing shareholder wealth, but also improving the lot of all stakeholders, including customers, employees, vendors, and communities. Business Roundtable is a powerful group of the CEOs of America’s leading companies, most of them representing not promoters but the wider shareholding public. 

India’s IT giants must additionally do more for India and Indian customers, thus building long-term value not only for shareholders, but also the wider community from which they draw their own talent and resources.

R Jagannathan is editor and former editorial director of Swarajya magazine. He tweets @TheJaggi. Views are personal.

(Edited by Aamaan Alam Khan)