Cash reserves help IT biggies stay in shape

2 May 2009 ET Bureau

MUMBAI: It is said what one does in the past matters the most when times are tough. And if this is true, then the country’s top three IT companies —
Tata Consultancy Services, Infosys Technologies and Wipro — have a reason to cheer. Their balance sheets for FY09 show that the IT biggies are sitting on healthy reserves and surplus, which can help them in times of crisis, said experts.

Reserves and surplus account of a company consists mainly of retained net profits over the years, apart from share issue premium. Unlike manufacturing companies where the reserves and surplus prominently reflect fixed manufacturing assets, for IT companies liquid assets such as cash and equivalents, sundry debtors, and loans and advances constitute as much as two-third of the reserves and surplus.

“The reserves and surplus account of an IT company mainly represents liquid assets, since the sector is not capital intensive unlike manufacturing companies. For IT companies, it means huge cash,” said investment advisor SP Tulsian.
The largest IT exporter TCS reported reserves and surplus of Rs 15,502 crore at the end of FY09, up 28% from last year. For Infosys, which trails TCS in revenues, it was up by 33% to Rs 17,968 crore. Wipro, which is third in line, recorded a rise of nearly 20% in its reserves and surplus at Rs 13,630 crore.

“Top IT companies have been running profitable operations, which have shored up the reserves and surplus accounts. This shows the strength of a company and since these are highly liquid in nature, it also reflects their ability to face challenging environment,” said Infosys CFO V Balakrishnan.

However, the large reserves of top Indian IT companies are in sharp contrast with the practices followed by their larger global peers. For instance, IBM and Microsoft have not retained their earnings. These companies distribute their excess profits among stakeholders. Earlier this week, IBM declared buyback of shares amounting to $3 billion. The company has also raised its dividend by 10% - the 14th consecutive year in which it is increasing its dividend.

However, the management of Indian IT companies and accounting professionals whom ET spoke to feel that large reserves help in tough times. “Conservation of cash is essential given the uncertain environment. Cash provides safety and also fuels inorganic growth by facilitating acquisitions,” said Aravind Viswanathan, senior manager (investor relations) at Wipro. The company reduced its dividend from Rs 6 per share in the previous year to Rs 4 per share in FY09, PR Ramesh partner at Deloitte agrees. “It’s a good strategy on the part of companies to preserve cash in uncertain times. That provides for a war chest,” he said.