Times are tough, but faster turnarounds on the receivables front can be a morale-booster for Indian IT companies as it gives their balance-sheets a good makeover. While, lower Day Sales Outstandings (DSO) figures will keep the markets happy.
DSOs or debtor days of leading IT services companies were battered by worsening global economic conditions in the latter half of fiscal 2008 and early 2009. However, strong collections staged a comeback in fiscal 2009. "In bad times, one would expect a good degree of pressure on DSOs. A lower DSO in the current tough business environment is a good sign and shows that some amount of discipline is entering the collection systems of these companies," said Siddharth Pai, partner and MD of outsourcing consultancy firm TPI India.
DSO, which is the ratio between accounts receivables and sales of a company, is a measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable.
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With the exception of HCL, whose DSO increased marginally, the top companies showed quarter-on-quarter increase in DSO between March 2008 and March 2009.
A TCS spokesperson said that a concerted effort had been made by the company to improve collections and bring down receivables. “Sales has been increasing every quarter on a LTM (Last Twelve Months) basis - even in Q4, when we had a sequential decline in revenues, there was still LTM revenue growth of 4 per cent. That is how we were able to reduce DSOs by 12 days in the last two quarters.”
On whether TCS was placed in a situation where it has to apply pressure on clients, he said, “We have been through rigorous account-by-account reviews of receivables followed by root cause analyses of the laggards, a streaming collections process and diligent follow-up with clients.”
Wipro Technologies saw DSO dropping to 60 in March this year on the strength of improved collections in the Wipro Infotech part of the business. The company had witnessed a DSO of 67 in the June quarter of fiscal 2009 which it whittled down to 62 in the quarter ended December 31 last year.
“Our DSO has fallen primarily as a result of our increased efficiency in time taken to invoice, and rigorous follow-ups which enables much faster and timely collections than we have experienced in the past,” Wipro Technologies Chief Financial Officer Manish Dugar said.
Dugar noted that Wipro has been seeing clients who filed for bankruptcy put their outstandings on freeze till a settlement is reached. “There is a general pressure on collections from that perspective,” he said.
According to Dugar, clients are also looking much more into their balance-sheets due to the liquidity crunch. “So, there is a tendency to negotiate hard on payment terms. Having said that, we have put a lot of focus on reducing our DSO besides reducing our capital expenditure which has improved our free cash flow position. This has been achieved through increased efficiency, and not necessarily through putting pressure on clients,” Dugar said.
“The current economic conditions are much more challenging and volatile. We have extra focus to make sure that we are current with all our clients on the receivables front and follow through to make sure that there is no overdue with any client,” said V Balakrishnan, chief financial officer, Infosys Technologies. He ruled out any negative impact from past acquisitions on the company’s current receivables.
Denying that last year’s acquisition of Citigroup Global Services (now TCS eServe) could have exercised a negative effect on DSO, the TCS spokesperson too ruled out any such impact.
However, Anil Chanana, executive vice-president (finance), HCL Technologies, said that the acquisition of Axon, which has a different receivables profile, had led to a “full quarter impact” on his company's DSO. “While we had the number of days going up, the percentage of receivables in 0-60 days and from 60-90 days improved substantially,” Chanana said.
"It is natural for IT companies to keep DSOs under check, especially when their clients are facing cash flow pressures," said Sabyasachi Satpathy, director, Mindplex Consulting. He said that IT companies are continuing to maintain the current industry standard for DSOs which is in the range of 30-45 days of the bill invoicing.
Angel Broking analyst Harit Shah said that it would be difficult to predict if companies could maintain their lower DSOs into the coming quarters of fiscal 2010. "It is good to see them renewing their focus on improving their collection efficiencies," he added.
While the overall liquidity of leading IT companies has improved thanks to lower DSOs, their accounts receivables have also turned out to be on the stable side despite pressure on business volumes in the latter half of fiscal 2009.