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In our series of quarterly updates, we have analysed balance sheet
metrics since Q4FY06 of Tier-I IT companies to evaluate collection and
vendor financing trends. For this analysis, we have collated account
receivables, unbilled, unearned revenues and cash flow from operations
for twenty quarters (HCL seven quarters). Analysing vendors on unusual
metrics, apart from PE and PE/G, helps underscore the investment
rationale. As a general observation, Wipro scored worse in our analysis,
TCS best, while Infosys and HCL were amid both. Overall, we have
maintained our BUY rating on TCS (superior volume growth and
balance sheet scorecard) and HCL (inexpensive Tier I valuation), ADD
rating on Infosys (unwarranted expectation could limit upside,
reorganisation, change in CEO) and REDUCE rating on Wipro (inferior
volume growth, poor balance sheet metrics and focus disruption likely).
TCS scored best in our analysis but DSO could be healthier
TCS scored best in our analysis as unbilled revenues net of
unearned grew at the slowest pace within the peer set. Unbilled
revenues net of earned grew at 7.7% CQGR between Q4FY06 and
Q3FY11 vs. revenue growth of 5.2% during the same period.
Similarly, unbilled net of unearned grew at 18.2% CQGR for Infosys
and 6.9% for Wipro. Noticeably, for TCS, average YoY and QoQ
unbilled revenue growth has been 1x and 0.6x slower than its
revenue growth. TCS’ unbilled revenue has now reached 13%of
reported revenue, lowest since Q4FY06 and its 19.4% historical
(Q4FY06-Q3FY11) average. Account receivables (A/R) increased 340
bps sequentially and now stand at 79.4% of Q3FY11 reported
revenues but is lower compared to its 83.9% historical (Q4FY06-
Q3FY11) average. Total and A/R DSO have worsened to 82 and 70
days, respectively, from 81 and 67 in Q2FY11. However, they are
lower compared to its 91 and 75 days historical (Q4FY06-Q3FY11)
average. CFO generation as a percentage of revenue has improved
to 25.1% vs. 18% in Q2FY11 and its historical average of 20%.
Overall, we believe TCS’ balance-sheet has improved over time
except for DSO, which remained higher compared to Infosys.
Wipro scored worst in our analysis
Wipro fared worst in our analysis as both unbilled net of unearned
(68% vs. 10.6% YoY revenue growth) and A/R (21.5% vs. 10.6%)
grew faster than revenue growth in Q3FY11. Though unbilled net of
unearned declined 4.5% QoQ vs. 0.2% growth in Q3FY11 revenues,
A/R grew 21.5% QoQ. Further, unbilled net of unearned stands at
19.6% of Q3FY11 revenue 5.5 percentage points (pp) higher
compared to its historical (Q4FY06-Q3FY11) average of 14.1%.
Similarly, Q3FY11 A/R stands at 89.6% of revenues, higher
compared to its historical 80.9% average. Total and A/R DSO have
worsened to 109.1 and 79.8 days, respectively, from 102.7 and 73.8
in Q2FY11 and substantially higher compared to its historical
(Q4FY06-Q3FY11) average of 91.8 and 72 days , respectively. Finally,
Wipro’s CFO has grown at 0.5% CQGR during Q4FY06-Q3FY11 vs.
4.6% CQGR growth in revenues. CFO generation as a percentage of
revenue stands at a meagre 8.9% vs. 17.1%, its historical average.
Overall, Wipro’s balance sheet metrics have deteriorated over time.
Infosys: Best receivable management but unbilled remains a concern
Infosys’ balance sheet metrics were uneven. While historical
(Q4FY06-Q3FY11) CQGR growth of A/R was in line with revenue
growth (5.4% each) but at 18.2% CQGR unbilled net of unearned
grew faster. Further, the average QoQ unbilled net of unearned
growth was 2.6x faster than corresponding revenue growth. Though
this could be attributed in part to higher share of fixed price
contracts (43.3% in Q3FY11 vs. 28.1% in Q4FY06), the growth
remains at elevated levels. That said, Infosys, continues to manage
receivables well with 60.9% (Q3FY11) of revenues in receivables,
lower compared to its historical average of 62.7%. At 67.7 and 54.6
days, total and A/R DSO are in line with their respective historical
average of 66.7 and 55.9 days. CFO as a percentage of revenue
stood at 22.8% vs. 24.5% historical average (Q4FY06-Q3FY11) and
has grown at 8.3% CQGR during this period, higher than revenue
growth.
HCL: Limited historical data hinders analysis
HCL’s balance sheet data was available only for seven quarters
compared to 20 quarters for others. That said, unbilled revenues
grew at 4.5% CQGR, lower compared to 5% revenue growth and
stand at 17.4% of revenues vs. its historical average (Q1FY10-
Q2FY11) of 18.9%. However, average QoQ unbilled growth was
higher than the corresponding revenue growth (6.4% vs. 4.5%).
Receivables as percentage of revenue continued to decline and now
stand at 67.4% vs. its historical average of 83.6%. Total and A/R
DSO have also declined to 76.3 and 59.5 days vs. 77 and 61 days in
Q1FY11 and its historical average of 83.1 and 77.2 days,
respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In our series of quarterly updates, we have analysed balance sheet
metrics since Q4FY06 of Tier-I IT companies to evaluate collection and
vendor financing trends. For this analysis, we have collated account
receivables, unbilled, unearned revenues and cash flow from operations
for twenty quarters (HCL seven quarters). Analysing vendors on unusual
metrics, apart from PE and PE/G, helps underscore the investment
rationale. As a general observation, Wipro scored worse in our analysis,
TCS best, while Infosys and HCL were amid both. Overall, we have
maintained our BUY rating on TCS (superior volume growth and
balance sheet scorecard) and HCL (inexpensive Tier I valuation), ADD
rating on Infosys (unwarranted expectation could limit upside,
reorganisation, change in CEO) and REDUCE rating on Wipro (inferior
volume growth, poor balance sheet metrics and focus disruption likely).
TCS scored best in our analysis but DSO could be healthier
TCS scored best in our analysis as unbilled revenues net of
unearned grew at the slowest pace within the peer set. Unbilled
revenues net of earned grew at 7.7% CQGR between Q4FY06 and
Q3FY11 vs. revenue growth of 5.2% during the same period.
Similarly, unbilled net of unearned grew at 18.2% CQGR for Infosys
and 6.9% for Wipro. Noticeably, for TCS, average YoY and QoQ
unbilled revenue growth has been 1x and 0.6x slower than its
revenue growth. TCS’ unbilled revenue has now reached 13%of
reported revenue, lowest since Q4FY06 and its 19.4% historical
(Q4FY06-Q3FY11) average. Account receivables (A/R) increased 340
bps sequentially and now stand at 79.4% of Q3FY11 reported
revenues but is lower compared to its 83.9% historical (Q4FY06-
Q3FY11) average. Total and A/R DSO have worsened to 82 and 70
days, respectively, from 81 and 67 in Q2FY11. However, they are
lower compared to its 91 and 75 days historical (Q4FY06-Q3FY11)
average. CFO generation as a percentage of revenue has improved
to 25.1% vs. 18% in Q2FY11 and its historical average of 20%.
Overall, we believe TCS’ balance-sheet has improved over time
except for DSO, which remained higher compared to Infosys.
Wipro scored worst in our analysis
Wipro fared worst in our analysis as both unbilled net of unearned
(68% vs. 10.6% YoY revenue growth) and A/R (21.5% vs. 10.6%)
grew faster than revenue growth in Q3FY11. Though unbilled net of
unearned declined 4.5% QoQ vs. 0.2% growth in Q3FY11 revenues,
A/R grew 21.5% QoQ. Further, unbilled net of unearned stands at
19.6% of Q3FY11 revenue 5.5 percentage points (pp) higher
compared to its historical (Q4FY06-Q3FY11) average of 14.1%.
Similarly, Q3FY11 A/R stands at 89.6% of revenues, higher
compared to its historical 80.9% average. Total and A/R DSO have
worsened to 109.1 and 79.8 days, respectively, from 102.7 and 73.8
in Q2FY11 and substantially higher compared to its historical
(Q4FY06-Q3FY11) average of 91.8 and 72 days , respectively. Finally,
Wipro’s CFO has grown at 0.5% CQGR during Q4FY06-Q3FY11 vs.
4.6% CQGR growth in revenues. CFO generation as a percentage of
revenue stands at a meagre 8.9% vs. 17.1%, its historical average.
Overall, Wipro’s balance sheet metrics have deteriorated over time.
Infosys: Best receivable management but unbilled remains a concern
Infosys’ balance sheet metrics were uneven. While historical
(Q4FY06-Q3FY11) CQGR growth of A/R was in line with revenue
growth (5.4% each) but at 18.2% CQGR unbilled net of unearned
grew faster. Further, the average QoQ unbilled net of unearned
growth was 2.6x faster than corresponding revenue growth. Though
this could be attributed in part to higher share of fixed price
contracts (43.3% in Q3FY11 vs. 28.1% in Q4FY06), the growth
remains at elevated levels. That said, Infosys, continues to manage
receivables well with 60.9% (Q3FY11) of revenues in receivables,
lower compared to its historical average of 62.7%. At 67.7 and 54.6
days, total and A/R DSO are in line with their respective historical
average of 66.7 and 55.9 days. CFO as a percentage of revenue
stood at 22.8% vs. 24.5% historical average (Q4FY06-Q3FY11) and
has grown at 8.3% CQGR during this period, higher than revenue
growth.
HCL: Limited historical data hinders analysis
HCL’s balance sheet data was available only for seven quarters
compared to 20 quarters for others. That said, unbilled revenues
grew at 4.5% CQGR, lower compared to 5% revenue growth and
stand at 17.4% of revenues vs. its historical average (Q1FY10-
Q2FY11) of 18.9%. However, average QoQ unbilled growth was
higher than the corresponding revenue growth (6.4% vs. 4.5%).
Receivables as percentage of revenue continued to decline and now
stand at 67.4% vs. its historical average of 83.6%. Total and A/R
DSO have also declined to 76.3 and 59.5 days vs. 77 and 61 days in
Q1FY11 and its historical average of 83.1 and 77.2 days,
respectively.
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