Indian information technology (IT) companies have traditionally conserved a large part of the cash they generate. While analysts and some investors have objected to this policy, these companies have continued to restrict dividend payouts and have shunned other forms of returning cash such as buy-back of shares.
But over time, the amount of accumulated cash has increased and is affecting the return ratios of some firms considerably. Infosys Technologies Ltd has the largest cash hoard in the industry, both in absolute terms and as a proportion of total assets. At the end of March, it had cash worth $3.27 billion (around Rs15,300 crore), which amounts to 53% of its total asset size.
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Infosys’ return on invested capital—excluding cash—in 2009-10 was impressive at 58%. But it earned just around 7% on its cash investments, diluting the company-wide return on capital employed (RoCE)) to a much lower 32%.
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Similarly, Cognizant Technology Solutions Corp.’s return on invested capital stood at 35% in the year ended December. But its cash assets of $1.4 billion earned a return of just 1.5%, since most of its funds are parked in money market funds in the US. As a result, its RoCE was just 22.3% last year.
The impact of cash assets on some other large firms such as Tata Consultancy Services Ltd (TCS), Wipro Ltd and HCL Technologies Ltd is relatively lower since the proportion of cash to total assets is lower at 17-29%. For instance, TCS’ return on invested capital stood at 37% and its overall RoCE wasn’t much lower at 32.7%. Infosys’ cash now accounts for as high as 68% of its trailing 12-month revenue, compared with 46.5% in March 2009.
According to a fund manager with a domestic insurance company, these companies needn’t keep more than 15-20% of annual revenues in cash to finance acquisitions. Even after accounting for capital expenditure, Infosys generates cash of around 20% of revenue each year and any outflow on acquisitions would soon be replenished. And given the company’s caution with respect to acquisitions, it’s highly unlikely that it would spend more than 20% of revenue ($1 billion in Infosys’ case) on acquisitions in a year.
The high cash generation also addresses concerns about having inadequate cash during times of crisis. In this backdrop, it doesn’t make economic sense to have a large cash pile earning a return of around 7%, and companies such as Infosys should either return cash through a special dividend payout like Microsoft Corp. did or by buying back shares.
Graphic by Ahmed Raza Khan/Mint
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