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IT industry: A glance at liquidity position - Views on News from Equitymaster

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IT industry: A glance at liquidity position
Dec 10, 2008

Amidst global financial crisis, liquidity crunch has emerged as a major cause of concern for most companies worldwide and in India. This is affecting working capital management and capital expenditure of companies and slowing down growth. In order to understand how this liquidity crunch can affect Indian information technology (IT) companies, we have analysed their liquidity position. Following is the table which elucidates the same for some of major IT companies.

Liquidity position of IT companies
Companies Cash & bank balance (Rs m) Avg debtors / sales (%) Current Ratio (CA/CL) (Cash & Bank balance + mkt sec)
/ Wage per month
Cash Flow from
operations / Sales (%)
Debt /equity
TCS 12,234 18.0 1.6 4.2 20.6 -
Wipro 39,270 18.1 1.2 6.8 4.1 0.3
Infosys 69,500 17.4 2.8 9.3 22.8 -
Satyam 45,024 25.4 5.0 9.9 17.4 -
HCL Technologies 10,112 18.1 1.1 13.4 26.2 -
Tech Mahindra 976 28.9 1.4 0.5 17.6 0.1
Oracle Fin. Sev. 8,966 55.5 3.2 7.9 18.4 -
Mphasis 953 12.5 1.2 1.5 10.3 -
Mindtree 546 21.4 2.4 5.6 12.4 0.2
3i Infotech 2,665 33.8 1.9 3.1 44.6 2.0
Source: CMIE * CA/CL = Current Asset / Current Liability

As per data shown above, liquidity is not of great concern for Indian software companies, especially the large ones like Infosys Wipro and TCS. These companies are sitting on pile of cash which they can utilise to fund their working capital and even their capital expenditure without any short term borrowings.

Indian IT companies have average current ratio of around 1.5 times. This indicates that they have enough resources to meet their short term liabilities. Also, while some of these companies have exposure to foreign loans, most others are debt free.

IT is a human resource intensive industry. The current financial crisis has posed threat on sustainability of this business model. But IT firms are still hiring, though at lesser levels as compared to the previous year. Also, they have not yet retrenched employees in a major way. These companies have sufficient funds to shell out wages for over 3 to 13 months. While Infosys can fund wage for almost 9 months with its cash, its peers TCS, Wipro and HCL Technologies can pay wages for 4, 7 and 13 months respectively without any incremental cash generation.

Conclusion
As seen from the table above, Indian IT firms have cash reserves ranging Rs 500 m (Mindtree) to Rs 70 bn (Infosys). This gives these firms flexibility to invest in newer opportunities including acquisition possibilities. Given the global turbulence, many acquisition targets now come at attractive valuations. A comfortable liquidity position of Indian IT firms is a great resource to quickly acquire a distressed asset, enhance new services portfolio or create technology solutions. Overall, sufficient liquidity gives these firms enough capability to wade through this slowdown with minimal impact.

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