Oracle Buys the Future, Infosys Buys Back the Past!

The caption above was a screaming headline in one of the financial dailies recently, which succinctly describes the difference in the vision or mindset of the Western and Indian tech companies.

Over three decades Indian tech companies made India the back office of the world. This was a sector that played the leadership role in the nineties in transforming India’s economy and uplifting millions of middle-class families by providing employment opportunities. What then ails this, what once appeared like the goldilocks sector?

Over this period however, Indian tech companies were content to benefit from the offshoring and asset-light business model that leveraged India’s plentiful, low-cost engineering talent, unmindful of the fact that business models and tech paradigms change every few decades, if not more often. And now the change is beginning to unfold. TCS recently announced that it is letting go over 12000 of its employees, constituting 2% of its workforce. While TCS explained it away as part of its evolving journey, for discerning investors it was an indication of the pressure on the industry. In quarter one of FY 23, TCS, Infosys, HCL Tech and WIPRO grew their constant currency revenues by between 15.5% to 21.4% which in quarter one of FY 26 were ranging from -3.1% to 3.8%. Their constant currency annualized growth in FY 26-27 is likely to be in the range of -2.5% to 4.5%. This seems to be more than a garden variety of cyclical downturn. 

The latest results declared by TCS for second quarter of FY 2025-26, are tad better but the headcount during last 3 months has come down significantly by about 20000. Management commentary indicates that it is planning to make amends for lack of investments in the past. It has announced plans to build a 1 GW capacity AI data centre in India. But the plan, right now, appears to be more of a statement of intention as details are lacking on strategy and timeline.

The headline alluded to above encapsulates the challenge facing Indian tech sector. Oracle and many other Western companies build, innovate and invest in future shaping technologies. Indian companies on the other hand have been have been providing low-cost Indian talent to help US companies to create cutting edge products, Intellectual Property Rights (IPRs) and IT infra & platforms that straddle the globe. This worked for the employees and certainly, for the shareholders as these companies have been generous in distributing cash through hefty dividends and buybacks. Oracle has been around for decades. The easy option would have been to conserve cash and depend on database and maintenance services. Instead, it is pouring billions into AI partnerships, cloud infra and next generation software layers. Investors see growth, scalability and intellectual property. They have handsomely rewarded the pivot with 1 year forward PE of 45 ahead of Amazon and Microsoft.

Down 18.7% year to date, Infosys in contrast, has chosen the path of least resistance. Rather than redeploy capital into new product bets, AI platforms or new growth engines, it hands over Rs 18000 crores to shareholders by way share buybacks. This is a safe and predictable move, typical of an IT services company addicted to linear, headcount driven revenues. TCS, Infosys, HCL Tech and Wipro, in the last decade returned around a staggering Rs 6.2 lac crores to shareholders via dividends and buybacks. In contrast, their capital investments were just about Rs 90000 crores. The difference clearly shows! While Alphabet (Google), Apple, Microsoft and Nvidia posted net profits of $ 90 billion to $ 140 billion in the latest reporting year, TCS, the largest of the Indian tech companies reported just $ 3.6 billion in FY 24-25.

Sadly, at the moment it appears that the Indian IT sector is caught napping, even as AI is rewriting the rules of doing business and regulatory changes on the anvil are threatening the well-worn offshoring business model. The latest bill with acronym HIRE Act (Halting International Relocation of Employment Act) could hurt Indian IT services and Global Capability Centres (GCCs). The Act proposes a 25% tax on all outsourcing payments paid by US company or taxpayer to ‘foreign person’ for work which benefits US consumers. The definition of foreign workers is quite broad and might even cover non-immigrant visa holders in the US. In a further blow the H1-B visa fee has been increased ten-fold to a prohibitive $100000 and where such visa is sponsored by US company the fee is $200000. This hike strikes at the core of Indian IT services playbook built around rotating engineers into client sites in the US and scaling delivery from offshore centres.  The dire consequences are more imminent than just a writing on the wall and Indian tech companies can’t lose any more time in rethinking their business strategies.

But there seem to be prescient voices that suggest a silver lining for the Indian tech sector. This is what the Economist (London) has to say about the prospects for the sector:

“Foreign dependency is less of a problem than it may seem. True, India does not create the latest models or the fastest AI chips. But its firms can innovate in a distinctive way, by turning AI into world-beating products and services. India has the world’s second-largest pool of developers on GitHub, a coding platform, and a vast domestic market in which global tech giants and local firms compete side by side. That gives its firms both the talent and the testbed to create usable, affordable services that do the sorts of things that ordinary people want from AI.

Already, Indian users are shaping how the most popular AI models develop. Voice, not text, has quickly emerged as the dominant way of interacting with AI tools in India, in part because some users struggle to read. Indian firms are especially adept at designing services for a varied audience.

The “India Stack”—India’s digital platform for biometric identification and payments—has already become a model for other countries. Products infused with AI could be the next export of this kind: frugal, scalable innovation that is pioneered in India but adopted across the developing world. India’s path will not mirror America’s or China’s. But it could prove no less consequential. For billions in poorer countries, the shape AI takes could depend on what happens in India”. 

Where does the harried investor look for new opportunities for profitable investment opportunities in a once shining sector? May be in little known companies like Netweb, with a nascent (became a public limited company only in November 2022) but nevertheless, a credible growth story or companies which quickly and successfully adapt to the new reality. One could also look at funds with offshore exposure or ETFs, particularly those comprising top NASDAQ companies. There still appears to be some hope amidst the prevailing gloom in the sector.