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India's tech giants repurchase shares, buying time to build new ops

Faltering software development business has investors uneasy

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CEO Rajesh Gopinathan of Tata Consultancy Services.   © Reuters

MUMBAI -- India's leading information technology service companies have launched massive share repurchase programs to keep their stock prices high even as rising costs and automation erode demand for their core contract software development offerings.

Wipro, a top IT outsourcing firm, approved a 110 billion rupee ($1.71 billion) buyback program last Thursday. That figure amounts to roughly 7% of the company's market capitalization. The shares ended Tuesday up 8% from their level before the announcement. Infosys, another such firm, plans to spend up to 130 billion rupees buying its own shares in fiscal 2017 through March 2018. Tata Consultancy Services held a 160 billion rupee buyback in May.

India's listed companies in fiscal 2016 spent or announced they would spend more on their own shares than at any time during the past 20 years -- a total of 344.6 billion rupees across 49 companies, according to Prime Database, a research service covering India's capital markets. And that includes TCS's buyback, which was announced last fiscal year but conducted this fiscal year, meaning repurchases by the three IT service companies in fiscal 2017 top the total in fiscal 2016 by India's corporate sector overall.

Nothing else to do

Repurchase programs let these cash-rich companies pay some of their profit back to investors. But each rupee spent buying back shares is one that cannot be put toward growth investment. That these financial powerhouses are putting shareholder return first is in some way a sign that achieving rapid growth is no longer as simple as it once was.

Lackluster earnings bear out this conclusion. Operating profit at both TCS and Wipro's IT unit fell 6% on the year in the April-June quarter. Infosys managed only a 2% climb. TCS CEO Rajesh Gopinathan remained confident in the face of this decline, asserting that a series of planned projects "positions us well for growth" in the current fiscal year. But this optimism has not been reflected on the company's earnings forecast.

India's IT service sector has traditionally thrived on performing high-value tasks with relatively low-cost labor. But the rising cost of that key ingredient has eroded these firms' advantage in recent years. In the U.S., where many clients are located, the administration of President Donald Trump has announced tougher restrictions on visas for foreign technology workers, making it more difficult for companies to send employees over from India.

These companies are also falling prey to a phenomenon they helped in part to advance: automation. Indian firms and their armies of engineers have long taken over part of the labor-intensive software development process from companies in advanced nations. But new automation software has made development a good deal less arduous. The advancement of artificial intelligence will provide further improvements in this area, undermining Indian companies' staff-intensive strategy.

New focus

Investors' awareness of this quandary has started to weigh on IT shares, even amid a boom for the Indian stock market overall. The Bombay Stock Exchange's benchmark Sensex index has climbed steadily this year and is currently holding near a record high, above 32,000. Wipro, Infosys and TCS, on the other hand, have faltered a number of times since January. While TCS climbed 1.61% above Monday's close on Tuesday, the shares nevertheless stand 5% below a recent high in early June.

For India's IT sector to keep growing, the country must take on a new identity as a global technology hub, shifting focus from low-cost contracting to cutting-edge development, according to the National Association of Software and Services Companies, or NASSCOM. Companies are taking steps toward such a change: Infosys in April launched a new artificial intelligence platform that has attracted more than 70 clients so far, and is investing in big data analytics and cloud computing as well. TCS's digital segment, which includes smartphone app development alongside cloud computing and big data, saw revenues climb 26% on the year in April-June.

But re-centering such massive companies on these new services will take time. While investing in cloud computing, AI and other digital fields is a good idea, how much they will ultimately contribute to earnings, or when, is tough to predict, according to Kotak Securities. This year looks to be another tough one for the IT sector, a representative of the brokerage said.

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