HSBC Global Research, in a note on Monday, questioned whether the cash collection of India’s top-tier IT services firms is getting compromised. The firm noted that unbilled revenues and receivables are going up for Indian companies over the past few quarters, impacting cash flows. Unbilled revenues for the top three companies ? TCS, Infosys and Wipro ? have increased by 12-21% sequentially in the June quarter, compared with revenue growth of 0-7%. IT firms, on their part, said that the trend was not worrisome and was a result of the changing nature of contracts.
?While volume growth has been the focus of the quarter, we see increasing weakness in the cash collection across all the companies as trade receivables and unbilled revenues have consistently gone up in the past few quarters. Similar trends are observed when we look at revenue receivables as well,? Yogesh Aggarwal, analyst with HSBC Securities and Capital Markets, said in a flashnote and added that the continuation of these trends in the coming quarters would warrant higher attention.
Several factors may have added to rising unbilled revenues, the firm said. One, companies are reducing the focus on time and material (T&M) contracts and are engaging with the clients by taking higher risk through fixed-price contracts.
?Reported statistics, however, do not suggest that as the proportion of fixed price contracts has not changed much in the past few quarters. Second, Indian companies are doing higher proportion of long-term transformational deals where the initial transition period is billed over the duration of the project and therefore sits on the balance sheet as unbilled revenues. Third, from our discussion with the companies, in a high growth environment, usually client-facing teams are more engaged in winning and delivering business than cash collection and it is therefore a temporary phenomenon,? the firm noted.
Infosys’ CFO V Balakrishnan told FE that the firm’s unbilled revenues have gone up as it was doing more transformational projects now which are long term in nature. The firm was also engaged in more large system integration projects in India which contributes to the high unbilled revenues. ?As a concept, unbilled revenues are those where we have spent efforts on the projects but the billing to client had not happened due to not achieving the billing milestones. Also, if you look at our fixed price projects it has gone up and are close to 40% of revenues now. It has definitely gone up due to all the above reasons but is not worrisome,? he clarified.
June quarter results and management commentary had indicated that technology spending has remained robust despite macroeconomic turbulence. TCS outperformed expectations with a volume growth of 7% sequentially while Infosys grew 4%.