Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian IT is 'cash'ing in - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 16, 2009

    Indian IT is 'cash'ing in

    The inorganic growth space has seen a lot of buzz since the onset of economic downturn. It is estimated that with 34 US-based acquisitions, the Indian IT industry accounted for about 55% (by volume) of the US-based acquisitions during 2008. Companies from the healthcare, ERP and analytics domain were the main acquisition targets. While small and mid-sized companies like Rolta and NIIT Tech acquired to add service offering to their portfolio, the larger ones like 3i-infotech and Aegis BPO went inorganic in order to strengthen their current capabilities. The IT biggies also treaded this path in order to strengthen scalability, geographic presence and product offerings. While some acquisitions looked a little overpriced at the time of deal, synergies from these acquisitions have started showing in the financial performance of the companies.

    Acquirer Target Consideration
    TCS Citi BPO (India) US $ 505 m
    Wipro Citi Technology Services (India) US $ 127 m
    Tech Mahindra Satyam Computers US $ 500 m
    HCL Axon US $658 m
    CapitalStream US $ 40 m
    UCS group (ERP operations) US $ 8 m
    3i Infotech Regulus Group US $ 100 m
    Rolta Rolta TUSC Inc US $ 45 m
    WNS Aviva BPO business US $ 228 m
    Aegis BPO PeopleSupport Inc US $ 250 m

    Source: Company reports

    The biggest surprise in the acquisition space came from Tech Mahindra's multi billion bid to acquire scam-hit Satyam Computers. This shows of company's aggressive strategy to acquire scale in order to join the ivy-league of top Indian IT majors.

    Global downturn triggered these acquisitions in more ways than one. Firstly it made the valuations of the most of the target companies more realistic. As big MNCs felt the heat of slowdown, they hived off their non-core businesses. These businesses brought committed revenues and access to new clients for the acquirer. It also became a need of the hour as pure outsourcing deals went out of the vogue. Customers wanted all-round IT solutions for which companies amassed required skills inorganically. Big-ticket acquisitions also came with sourcing agreements which ensured revenue stream. For example Wipro's acquired Citi Technology Services with an agreement that the global bank will source services worth at least Rs 500 m from Wipro. All this is expected to aid Indian IT companies in climb up the value-chain by providing end-to-end development, IT consulting and enterprise software solutions.

    It is at this opportune time that internal cash accruals came handy as most of the Indian IT companies utilised the cash in their books to fund their acquisitions. And why not? Software, not being a capital intensive business, allows IT firms to stock a lot of cash in their bank accounts. The cash on books for the 5 major IT companies in India grew at a CAGR of over 62% over the last 5 years, while the total assets on their books grew at a CAGR of 37%. In other words, the companies were cash rich, with cash balances accounting for around 10% of their total assets. Infosys is an exception again, as it maintained over 40% of its assets in the form of cash and bank balances. However, it is worth noting that Infosys did not acquire any firm recently as it continued to invest in its own subsidiaries in China and Mexico, which are still in nascent stages.

    Source: Company Annual reports

    With so much of cash sitting on the books and so many acquisition targets trading at attractive valuations, we believe it is a prudent decision to buy during the downturn. After all, that is what value investing is all about. Hopefully all of these come to fruition soon, as the Indian IT industry braces itself for economic recovery.



    Equitymaster requests your view! Post a comment on "Indian IT is 'cash'ing in". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)