Sitting on cash pile

Indian IT service provides are sitting on a huge cash pile – billions of dollars worth. Infosys cash reserve stands around $3.8b, TCS reserve stands around $1.6b and Wipro cash stands around $1.3b.

While the liquidity is a good thing to support the working capital need, as a contingency and as a cushion to wade through rough patches of the business cycle, too much unused liquidity is unproductive. Equity share holders do not invest in the company to keep the cash in money market instruments and bank deposits on long term basis. Equity stakeholders expect the company to efficiently use the cash so as to enhance the ROE/ROCE. If the company can’t use the cash efficiently, it is prudent to return the cash to investors as dividends.

Does the large cash pile reflect risk averse attitude of the Indian IT service providers? Or does it represent lack of innovation DNA? My take is it is a combination of both. Why can’t the cash be productively deployed for R&D and new product/solutions development?

Most of the Indian IT vendors prefer “string of pearls” approach and have acquired smaller companies in the last few years. Big acquisitions and big bang M&A are a no-no (expect for one or two rare instances like iGate acquiring Patni).

Long years have passed by with little action in this front by Indian IT companies. The window is closing – fast. I hope this wouldn’t turn into mere pipedream. I wish some increased traction happens in this front within a year or two.

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© Dhandapani Ammasai, 2011. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given with appropriate and specific direction to the original content.

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