'High shareholder returns impediment for some IT firms'

Global rating agency Moody's on Wednesday sounded an alert on high shareholder returns by some IT service issuers saying it was impeding their ability to respond to business demands.

It, however, said that the industry is set to grow strongly over the next 18-24 months.

"High levels of cash outflows to shareholders are reducing the ability of Indian IT services companies to respond to business demands, including the acquisition of new technology, as well as research and development to meet fast-evolving customer needs," said Saranga Ranasinghe, a Moody's Assistant Vice President and Analyst.

Moody's pointed out that five of the six Moody's-rated Indian IT services companies returned on average around 130% of cash flow from operations less capital spending to shareholders in the last 12 months.

While Tata Consultancy Services Limited (TCS, A3 stable) and Infosys Limited (A3 stable) constitute two of the five companies, both show large cash balances of around $6.6 billion and $4.8 billion, respectively, and are largely debt free.

"TCS and Infosys, therefore, have the financial strength to invest in their businesses and respond to external pressures, despite their high shareholder payouts," adds Ranasinghe.

"By contrast, Genpact, Marble II and HT Global IT Solutions retain little cash for growth spending, after returning large amounts to shareholders."

Moody's also explained that Genpact Limited (Baa3 stable), Marble II Pte. Ltd. (Ba2 stable) and HT Global IT Solutions Holdings Limited (Ba3 stable), have limited ability to incur fresh debt at their current rating levels.

Moody's analysis was contained in its just-released report titled "IT services — India: Shareholder returns impede some issuers' ability to respond to business demands," and is authored by Ranasinghe.

The report said that the global IT services industry should show strong growth over the next 18-24 months, driven by demand for digital solutions, which will more than offset the declines in legacy infrastructure outsourcing and lower spending related to on-premise enterprise resource planning implementations.

However, because the industry is facing challenges, including rising competition, pricing pressure and increasing employment costs, it is important for companies to maintain solid liquidity buffers to respond to the changing business conditions.