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Cash in balance sheet stays high for IT firms

Suresh Krishnamurthy
Bharat Kumar

Chennai , July 4

TOP IT firms gave more cash to shareholders. They also used cash to buy companies. Still, at the end of March 2004, the cash sloshing around in their balance sheet was high. Infosys, Satyam and Wipro hold about Rs 1,500 crore or more in cash, bank balances, term deposits and mutual fund units.

Cash and their equivalents as a proportion of net worth range between 30 and 60 per cent for prominent IT firms. Yields on this cash hoard have been below 4 per cent for these firms in 2003-04.

The large cash position pulls down the return on net worth, which measures the profitability of firms. Hence, the return on the net worth of IT firms is far lower than that of the return on invested capital. (Invested capital is net worth minus cash and cash equivalents.) As the gap between return on invested capital and return on net worth increases, it means that the company has invested less in operations and has more cash idling.

The gap between return on net worth and return on invested capital ranges between 60 per cent, for Infosys Technologies, and 10 per cent, for Geometric Software.

For instance, return on invested capital for Infosys Technologies is about 100 per cent for 2003-04. The return on net worth though is only about 38 per cent.

Even the return on invested capital of about 100 per cent understates the return for the software business to an extent. This is because their fixed assets in the form of infrastructure for software employees are underutilised.

For instance, in the case of Infosys, the built-up area of IT infrastructure can accommodate about 22,730 employees. The total number of software professionals in Infosys at the end of March 2004 was 21,765.

Given the onsite effort proportion of 33.8 per cent, the offshore infrastructure may be under utilised at least to the extent of about 30 per cent. In addition, work is in progress to build infrastructure for another 8,400 employees.

The phenomenon of underutilised fixed assets is true for Wipro too. Wipro has facilities of 2.94 million square feet, running at a seating capacity of about 80 per cent. Work is currently on for development of additional facilities to the tune of 2.5 million square feet.

If the value of the underutilised infrastructure and the land is also deducted from the net worth, the gap between return on net worth and return on invested capital would widen even more for IT firms.

IT firms, however, are not of the opinion that they hold excess cash or have made excess investment in infrastructure.

Says Mr T.V. Mohandas Pai, Chief Financial Officer, Infosys Technologies, "Our investment in infrastructure is based on our growth plans. Last year, we added 10,000 employees. This year, we would add about 8,000. This requires large infrastructure. Also, we need to have some slack in the system."

Analysts too are not perturbed. Mr Chetan Shah, Head of Research, Quantum Securities, said, "Due to high technology-cum-business risk, it is important to have cash to the tune of 1.5 to 2 years' worth of salaries in case something goes wrong. Besides, you need to have liquid assets to fund organic or inorganic growth opportunities."

He added that investing in real estate and in development centres was not risky since these centres were well out of city limits and obtained at compelling prices.

On the contrary, good campuses could become a good selling point in winning contracts against competition, all other things being equal, he said.

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