IT services industry - Grant Thornton India › globalassets › 1... · L&T Infotech Zensar FY19 market cap (USD billion) - Mid cap 16% 22% 12% 14% 11% 7% 10%9% 5% 8% 2% 12% 13%

©2019 Grant Thornton India LLP. All rights reserved.

IT services industry

Is cash still the king?


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


*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


• 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


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?


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


• 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

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Author team:

Manish Saxena

Kaushik Paul

Monica Voladri

For media queries, please contact:

Spriha Jayati

E: [email protected]

M: +91 93237 44249

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Acknowledgements


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IT services industry - Grant Thornton India › globalassets › 1... · L&T Infotech Zensar FY19 market cap (USD billion) - Mid cap 16% 22% 12% 14% 11% 7% 10%9% 5% 8% 2% 12% 13%