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©2019 Grant Thornton India LLP. All rights reserved.
IT services industry
Is cash still the king?
©2019 Grant Thornton India LLP. All rights reserved.
Introduction
2
IT companies in India have always been cash-rich.
However, over the last few years, as the sector has
matured and in the absence of any significant
investment opportunities, IT companies have increased
the cash return to investors by way of dividends and
share buybacks.
In this publication, we have evaluated the capital
allocation strategy adopted by large and mid-cap Indian
IT companies in the last three years to assess how the
cash positon of these companies has changed.
These publicly listed IT services companies analysed
constitute more than 90% market cap of the overall
Indian IT services industry.
Large-cap IT services companies analysed
• Tata Consultancy Services
• Infosys
• Wipro
• HCL Technologies
• Tech Mahindra
Mid-cap IT services companies analysed
• Mphasis
• Mindtree
• Hexaware Technologies
• Persistent Systems
• Zensar Technologies
• Larsen & Turbo Infotech
©2019 Grant Thornton India LLP. All rights reserved.
*Net Cash = Cash + Short-term investments - Debt
^Represents weighted average percentages based on market cap weights
• Despite significant buybacks and dividends, the absolute net cash position has remained fairly stable and has
increased in FY2019.
• This implies that companies are not eating into the cash existing on the balance sheet and are primarily using
the cash generated in a particular year for the payouts.
• However, net cash as a percentage of market cap has shown a downward trend in the last three years with
cash balance now constituting only 7% of the total market cap.
*Net cash = Cash + Short-term investments - Debt
8%
10%
8%7%
0%
2%
4%
6%
8%
10%
12%
Cash as a percentage of market cap (%)*^
FY 2016 FY 2017 FY 2018 FY 2019
How has the net cash position changed over the last four
years?
3
13.0
16.7
14.5 15.7
0.0
5.0
10.0
15.0
20.0
Industry closing net cash balance (USD billion)*
FY 2016 FY 2017 FY 2018 FY 2019
©2019 Grant Thornton India LLP. All rights reserved.
• FY 2019 witnessed an increase in divestment activities, especially by Wipro, in an effort to streamline the
core business of IT services companies. This has also resulted in an increase in the cash balance.
• While the last three years did not have any mega deals, the focus was mainly on acquiring smaller
companies to strengthen some specific capabilities of the IT services companies. Cash balance is likely to
come down in FY 2020 due to HCL’s acquisition of IBM’s software products, which is the largest acquisition
by an Indian IT company till date.
• Buyback is lower in FY 19 than in FY 18, implying toning down of return of capital by IT services companies.
However, as per recent management commentary, these companies are expected to continue returning
cash to their investors. For example, TCS has a capital return policy of 80%-100% of free cash flows, for
Infosys it is 80% of free cash flows and for HCL it is 50%-60% of net income.
1.2
0.3
0.7
0.10.0
0.4
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
FY 2017 FY 2018 FY 2019
Acquisitions and divestments
Acquistions Divestments
4
How has net cash been utilised over the last three years?
*Opening cash balance = Cash + Short-term investments - Debt
*Payouts = Dividend + Buybacks
*”Acquisitions” indicates gross acquisition and does not include divestments
*Others = Operating cash flow including other cash flows
9.2
13.0
©2019 Grant Thornton India LLP. All rights reserved.
Which company has spent the most proportion of its cash
on acquisitions?
5%
3% 2% 2%4%
2%
4%3%
2%1%
2%
12%
9%
6%
9%
4%
6%
2% 2% 3%2% 1%
8%
6% 5%
0.4%
4%2%
3%3%
2%3%
1%
0%
2%
4%
6%
8%
10%
12%
14%
Mphasis Infosys TCS Wipro HCL Mindtree Hexaware TechMahindra
L&T Infotech PersistentSystems
Zensar
Percentage returned to investors*
FY 2017 FY 2018 FY 2019
1.5%
3.0% 3% 2%
0%0% 0%
0.4%0% 0% 0%
1.9%2.7%
0%1%
0.9% 0.9%
0% 0.2% 0% 0% 0%
6.8%
0.2%
2%
0%0.9%
0.3%
1.0%
0%0.3% 0% 0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Zensar TechMahindra
HCL Wipro L&T Infotech PersistentSystems
Mphasis Mindtree Infosys Hexaware TCS
Percentage used for acquisitions**
FY 2017 FY 2018 FY 2019**Used for Acquisitions = Acquisitions/Opening market cap
**The graph has been presented in descending order based on the average of three years’ percentage used for acquisitions
*Returned to investors = (Dividend + Buyback)/Opening market cap
*The graph has been presented in descending order based on the average of three years’ percentage returned to investors
5
Which company is returning the most to its investors?
©2019 Grant Thornton India LLP. All rights reserved.
108.3
46.5 22.1 21.3 9.9
-
50.0
100.0
150.0
TCS Infosys Wipro HCL TechMahindra
FY19 market cap (USD billion) - Large cap
2.7 2.2
1.5 0.7
4.3
0.8
- 1.0 2.0 3.0 4.0 5.0
Mphasis Mindtree Hexaware PersistentSystems
L&T Infotech Zensar
FY19 market cap (USD billion) - Mid cap
16%
22%
12% 14%11%
7%10% 9%
5%8%
2%
12%9%
13%11%
7% 6% 6% 7%5%
7%
3%
18%
5%
10% 9% 7%10%
6% 5%9%
3% 3%
0%5%
10%15%20%25%
Wipro Mphasis PersistentSystems
Infosys L&T Infotech Tech Mahindra Mindtree TCS Hexaware Zensar HCL
Closing cash/Market cap (%)*
FY 2017 FY 2018 FY 2019*Net cash = Cash + Short-term investments - Debt
*The graph has been presented in descending order based on the average of three-year closing cash/market cap percentage
0.3
0.1 0.04
0.1
0.03 0.04
0.4
0.1
0.05 0.1
0.2
0.1
0.2
0.1 0.1 0.1
0.3
0.04
0.1 0.1
0.1
0.1
0.3
0.02
-
0.1
0.2
0.3
0.4
0.5
Mphasis Mindtree Hexaware PersistentSystems
L&T Infotech Zensar
Net cash balances (USD billion) - Mid cap*
FY 2016 FY 2017 FY 2018 FY 2019
6
Company-specific analysis
4.3 5.0
2.7
0.19 0.4
6.9
5.0
3.1
0.3 0.4
6.2
4.0
2.3
0.5 0.5
5.3
4.0 4.1
0.6 1.0
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
TCS Infosys Wipro HCL Tech Mahindra
Net cash balances (USD billion) - Large cap*
FY 2016 FY 2017 FY 2018 FY 2019
©2019 Grant Thornton India LLP. All rights reserved.
• Even after returning capital to their investors, IT
companies still have sufficient cash reserves to
continue acquiring in order to gain digital capabilities
and new-age technologies or diversify into
engineering and R&D domains, similar to
CapGemini’s acquisition of Altran.
• However, in the mid to long term, the appetite for
larger acquisitions may come down if the companies
continue the pace of their cash payout to the
shareholders.
• It is interesting to note that out of the companies
analysed, Mphasis has returned the most cash to
investors as a proportion of total available cash
balance.
• Wipro’s cash balance has actually increased in 2019
in terms of the percentage of market cap, due to
divestments and sharp fall in the payouts in 2019.
• Among all the companies that we have analysed,
Zensar has spent the maximum proportion of its
available cash balance on acquisition.
7
Key takeaways
©2019 Grant Thornton India LLP. All rights reserved.8
S&P Capital IQ database
Annual fillings of IT services companies
References
©2019 Grant Thornton India LLP. All rights reserved.9
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Author team:
Manish Saxena
Kaushik Paul
Monica Voladri
For media queries, please contact:
Spriha Jayati
M: +91 93237 44249
10
Acknowledgements
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