Corona virus spread is causing havoc in each and every sector of the industry. This causes various issues in information technology as well. Companies in IT sector made most of the employees to work from home and manage the client deliverables.
But in recent news, NASCOM, centralized association that represents IT companies requested Indian government to pay partial salary for the excess workforce. This allows IT companies to survive and if this is not done, companies will incur deep losses which create more crisis in the future. That is their argument.
Many people support this move and made their comment that the request from IT companies are correct. According to them these employees draw huge salaries and there is no mistake in letting these employees go or paying partial salary. Getting government support for paying salaries really important for the existence of these companies rather than sending a few employees out is their argument.
We will see whether these arguments are true. For that, we will go through the net profit generated by these companies in the last 5 years. It is observed that top 5 companies generated on average of Rs 10,000 crores as net profit every year.
People may argue that profit is the money earned by the company and it is not necessary to spend these profits for people who are in excess, in bench and not doing anything.
We will further see what these companies did with these profits generated in the last 5 years. If companies earn profit of Rs 10,000 crores per year, they had earned huge profit of Rs 50,000 crores in the last 5 years. We have seen most of the top companies use these profits to buy back shares from their investors.
Many of these companies did 3-4 times share buyback (almost every year buy back of share happened in most of the companies). The volume of these share buybacks is Rs 10,000-Rs 1,50,000 crores and it is observed huge proportion of profit money is spent on share buyback by these companies.
People supporting companies may come with the argument that investors are the people who added money and it is quite natural to share the profit of the company to the real investors and this is quite natural in public limited companies
We will see this factor in normal investor mentality. Investors invest money for the future growth of the company. Their expectation is that the profit will grow multi folds in the company shares of which they invest.
But long-term investors who invested their money in IT companies lost nearly 40-50% money in the last 2 years. Stocks of most of the companies dropped 40%-50% lower than in early 2018. Stocks of many of these companies dropped 20%-30% even before the Corona crisis. This means value of Rs 50,000 crores of the profit utilized in share buyback now dropped to Rs 25,000-Rs 30,000 crores at this point of time.
We will take companies like Reliance Industries on other side in comparison with IT companies. Reliance started as normal textile industries. Later it entered into other sectors. They have strong root now in various sectors like Petrochemical and retail. In addition, JIO in telecommunication becomes leading mobile provider across India in very short span of time. In the investors’ perspective, they expect companies they invest to increase the profits rather than buyback of shares.
The main problem with many of these IT companies is that they started with great leaders in early 80s with great mission. But these great leaders due to ageing factor (most of these company founders are above 70 now) are not very active now in their companies and it is run by their successors. These successors are born with silver spoons and getting several thousand crores as their profit every year. This makes these successors to miss the passion of real founders as they already have huge money. They are not showing interest in spreading their wings as companies like Reliance which spread their wings across sectors. They don’t know what to do with the profits generated and they just do buy back of shares or maximum take over existing companies.
Share market is driven based on future prospects of the company and if the shareholder feels that company will not generate their desired profits, this will pullback the share price very badly. There are various examples in this category starting from ENRON in USA till Reliance Communication in India.
Revenue of Information technology sector is coming only from their employee billing. This is not manufacturing sector where you need to budget for setting up of machineries in the factory. Employees are the asset of the company and reducing employees will pour more oil in the collapse of the IT industry in the long term. The IT employee count has a direct proportional relation to the profit of the company. If there are more employees working for the company, the company can generate more profit. If there are less employees, profit generated will be reduced. But sad reality is many of the IT companies are having flat employee strength or even reduced employee count in the last 5 years. This shows that business is not expanding as expected by the investors. The companies should now focus on addressing the real issue of utilizing their profits to generate more revenues rather than share buybacks.
The companies should understand that they cannot grow only by cost cutting. Their attempt to slice senior employees with junior employees will affect the overall morale of employees. They should focus on bringing more business and expand their business across sectors and grow multifold.
This is what the nation is also expecting from IT companies instead of them doing employee reduction in this crisis situation. There are various companies like in automobile sector where there is no production and they are affected more in lockdown compared to IT companies. IT companies operate with more than 85% work from home option. The companies standing with employees in this crisis situation will build the trust for them in front of the employees.
This is the expectation of the employees who generated several crore profits for the companies in the last 3 decades.
- Shyam Sundar