Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ROEs of IT Services companies have been on a structural decline due
to falling asset turnover (higher cash balances as % of total assets)
and rising tax rates. Larger companies have managed to offset the
impact of higher wages through levers such as an efficient pyramid,
change in offshore: onsite mix, a favourable business mix, better
operating leverage, and improved pricing. This has helped sustain
margins through cycles at a healthy rate of ~25%.
Leading vendors’ income tax rates have risen by 2-10pps over the last
five years, and this has been a key contributor to the fall in ROEs.
Furthermore, the sunset clause on STPIs in FY11 means that FY12 will
see the highest increase in tax rates. For TCS and Wipro, tax rates
would go up by ~4pps in FY12 alone. The impact would be more severe
for mid-tier IT vendors, given their poor SEZ planning. We expect many
mid-tier vendors to witness an increase in tax rate of ~6-10pps in FY12.
On the operating side, Infosys to a large extent benefited from higher
operating leverage from SG&A spend, a shift in the revenue mix
towards premium ERP/consulting offerings, and better management of
the age pyramid. At TCS, offshore’s share of revenue increased by a
staggering 10pps, leading to a substantial improvement in margins.
At the two largest IT Services firms, rising cash balances have been
amongst the key reasons for falling ROEs. At Infosys, cash balances
as a percentage of total assets have risen from ~45% to ~55% over
the last five years. At TCS too, they are up by about 10pps over the
same period. Infosys and TCS have been less successful in deploying
this cash tome to fund inorganic growth opportunities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ROEs of IT Services companies have been on a structural decline due
to falling asset turnover (higher cash balances as % of total assets)
and rising tax rates. Larger companies have managed to offset the
impact of higher wages through levers such as an efficient pyramid,
change in offshore: onsite mix, a favourable business mix, better
operating leverage, and improved pricing. This has helped sustain
margins through cycles at a healthy rate of ~25%.
Leading vendors’ income tax rates have risen by 2-10pps over the last
five years, and this has been a key contributor to the fall in ROEs.
Furthermore, the sunset clause on STPIs in FY11 means that FY12 will
see the highest increase in tax rates. For TCS and Wipro, tax rates
would go up by ~4pps in FY12 alone. The impact would be more severe
for mid-tier IT vendors, given their poor SEZ planning. We expect many
mid-tier vendors to witness an increase in tax rate of ~6-10pps in FY12.
On the operating side, Infosys to a large extent benefited from higher
operating leverage from SG&A spend, a shift in the revenue mix
towards premium ERP/consulting offerings, and better management of
the age pyramid. At TCS, offshore’s share of revenue increased by a
staggering 10pps, leading to a substantial improvement in margins.
At the two largest IT Services firms, rising cash balances have been
amongst the key reasons for falling ROEs. At Infosys, cash balances
as a percentage of total assets have risen from ~45% to ~55% over
the last five years. At TCS too, they are up by about 10pps over the
same period. Infosys and TCS have been less successful in deploying
this cash tome to fund inorganic growth opportunities.
No comments:
Post a Comment