The Hindu Business Line : IT majors prefer to stay ‘liquid’

Bangalore, Nov. 13 Large Indian software exporters have begun hedging business risks by making their balance sheets more liquid, preferring to hold a bulk of their cash reserves in bank deposits.

Such a liquid balance sheet would help these exporters meet any contingencies as business outlook deteriorates in the economic crisis-hit large markets — the US and Europe.

Indian IT vendors are facing uncertainty on the business front as customers in US and Europe have delayed their decisions on technology investments in view of the current market conditions.

As of September-end, the cumulative cash balances of top five vendors — TCS, Infosys Technologies, Wipro, Satyam and HCL Technologies — have grown by over a fifth over the past four quarters.

Infosys, followed by Satyam, leads the pack in terms of holding bulk of the cash in bank deposits, while the country’s largest exporter, TCS, holds a larger portion of its cash in mutual funds.

“It could be a tactical decision for these companies to hold their cash in deposits,” said Mr Harit Shah, equity analyst at Angel Broking Ltd. “Besides providing good returns, deposits provide a safety net in the current deteriorating environment,” Mr Shah said.

Cash reserves

Infosys has standard policy of maintaining cash reserves to cover a year’s expenditure. The company has redeemed its small investments in mutual funds about two-three quarters ago.

“Our entire 100 per cent cash is held in bank deposits because we feel it is much safer,” said Mr V. Balakrishnan, Chief Financial Officer, Infosys. “Cash is god, respect it,” Mr Balakrishnan said.

Besides helping these vendors to meet their expenses, mainly the employee wages, large cash deposits would equip them to pursue inorganic growth options in the current market where the valuations are at a low, Mr Shah said. Traditionally, the IT exporters have a liquid balance sheet because of the high-cash generating business.

Early this week, Satyam acquired Motorola’s captive software development centre in Malaysia. “We expect to see more such acquisitions happening in future,” Mr Shah said.

Like Infosys, Satyam has also placed all its liquid funds in bank deposits. “We constantly evaluate our strategy on utilisation of liquid fund positions. There are many options in front of us such as acquisitions, buy back and special dividends,” said Mr Srinivas Vadlamani, Chief Financial Officer at Satyam. “While our emphasis would be to invest in growth, organic and inorganic, we are not closed to any options,” he added.

TCS, Wipro and HCL Tech had a higher share of their reserves parked in mutual funds and treasury investments as of September 30, 2008. TCS had Rs 2,702 crore in mutual funds, while Wipro had invested Rs 3,956 crore in MMFs. HCL Tech had Rs 2,303 crore in treasury investments.

It could not be ascertained as to whether any of these three firms had divested from its mutual fund and other treasury investments in the past few weeks.

Wipro, which also had a $700 million debt on its balance sheet, is looking to conserve cash to fuel its growth initiatives.

“Our objective is to conserve cash to meet any growth opportunities,” Mr Suresh Senapaty, CFO, had said after the results in October.