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Covid-19: Over eight months on, IT firms take a relook at their real estate

Companies looking at WFH, shared workspaces and setting up centres in Tier-2 and -3 cities

December 01, 2020 / 03:48 PM IST
 
 
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Over eight months after IT firms pivoted to the work-from-home model, it is still evolving. However companies are looking at different real estate strategies, such as shared workspaces, sub-leasing and expanding to tier 2/3 cities.

This comes even as the companies are yet to see a major cost benefit from the new working model.

For instance, NYSE-listed business process outsourcing firm Startek has already reduced its physical capacity by 10 percent by giving up some real estate space.

Rajiv Ahuja, President, Startek, said in a recent interaction: “We figured that rather than wait for employees to come back (to cities) we need to have a strategy in place where we can go to the workforce. As we speak we are currently examining how we can probably set up centres in some other tier II/III cities so as to tap into the workforce there itself.”

Tech Mahindra is exploring shared workspaces. “Many modes of working, like virtual centres, shared seats are emerging. I think that is another journey we are starting. In our own centres, we are seeing how we can share some of these seats and facilities more effectively,” said Manoj Bhat, CFO, Tech Mahindra, in a recent interaction.

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However that will take another few quarters and the company is working with customers to figure out the best model, he added.

Karthikeyan Natarajan, COO of Cyient, a Hyderabad-based IT services firm, said that the company has consolidated its offices in Bengaluru and Hyderabad. “In the next 12 months, we will have better planning, be it consolidation, subleasing or expanding. In some tier-2 cities, we would like to expand,” he said.

There are a lot of challenges, however. Most of the companies have a mix of leased, (long term) and owned premises.

In terms of leased premises, not many are looking at ending agreements when the situation is still evolving.  Also, companies that are housed in Special Economic Zones, which offer tax benefits to Indian IT firms, are unlikely to move.

In a recent conversation, Jatin Dalal, CFO of Wipro, said: “Definitely you cannot reduce offices in SEZs. You stay with those.”

According to Dalal, the company continues to occupy most of its offices. “Of course we (will) reduce it when we don’t need it. But those changes happen gradually and you cannot reduce your offices overnight,” he said.

Nilanjan Roy, CFO of Infosys, also pointed out in the company’s recent analyst call that it is yet to decide on the share of WFH and will see how that model plays out (in the coming quarters). Infosys and Wipro, unlike TCS, are yet to share what the WFH percentage would look like for them, though they have said they are looking at a hybrid model.

TCS said that it is looking at 75 percent of its employees going WFH by 2025. However, it does not look like the firm is giving up its office space. India’s largest IT services firm had this to say in its Q2 FY21 earnings statement: “The Group does not foresee any large-scale contraction in demand which could result in significant down-sizing of our employee base rendering the physical infrastructure redundant. The leases that the Group has entered with lessors towards properties used as delivery centers / sales offices are long term in nature and no significant changes in the terms of those leases are expected due to the Covid-19.”

V Ramakrishnan, the company’s CFO, told Business Today that the real estate would be relevant for TCS and the vacant office spaces would be used to house laboratories and R&D facilities.

The other option for IT firms is to sublease, though this can prove to be a challenge. An IT executive pointed out that with many real estate players looking to sell their own property at a discounted rate, subleasing now is a challenge. According to the executive, the next 12 months would offer more clarity on how the situation evolves.

Additional expenses

On the other hand, companies continue to invest in WFH and employee benefits. Top IT firms saw their employee-related expenses increase for the six months ended September 2020 compared to the previous year.

Infosys’ employee benefit cost, for instance, accounted for about 73 percent of the total expense in H1 FY21 compared to 71 percent in H1 FY20.

For the six months ended September 2020, employee cost accounted for about 75 percent of the total expense as opposed to 71 percent in H1FY20 for TCS. Employee compensation cost accounted for about 66 percent in H1 FY21 as opposed to H1 FY20 for Wipro in term of total expenses.

However these companies saved costs on other expenses in the balance sheet and also on utilities and travel, thus keeping total expenses in check.

 
Swathi Moorthy
first published: Dec 1, 2020 03:48 pm

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