Indian IT Firms Low On Return On Equities

May 4, 2011

Newspaper reports cite that shareholders from Indian IT firms are not getting as much money as they were just five years ago. An analysis of IT companies reveal that return on equity numbers over half a decade has dropped significantly.

ROE is a measure of how a firm has been utilizing funds from shareholders. Moreover, it is also reflected in the earnings per share. When an investor look at high ROE, it shows the company has shares in growth areas and is not stifled by factors affecting the company’s profits.

IT analysts at Angel Broking, Srishti Anand said in an online report that although volumes have picked up it IT since the recession, there have been some cost pressures and pricing constraints that have affected profits. Wage inflation is another factor affecting the industry.

In essence, ROE is the division of net profits with average equity capital in a certain time frame. Yet another measure that is used in calculating profits, is return on investment (ROI). ROI is the overall calculation of debt and capital.

Angel Broking said, India’s NO.1 IT firm, TCS tagged its ROE at 55% in 2007. This drop continued throughout 2010 to 32.8%. This figure is estimated to go up to 34.7% in 2011. In the same timeframe, other IT majors have also seen their ROEs dropping consistently.

Analysts are also of the opinion that IT firms like Infosys, in particular, are holding to fairly high cash reserve levels; this effects ROEs. An inability to pay back shareholders or reinvest profits into its own business in terms of acquisitions or mergers is a drawback.

Other factors affecting ROEs is lower operational efficiencies, which firms like Wipro are trying to fix by restructuring. This should result in an enhancement of internal efficiency.  Moreover, in comparison with manufacturing, the IT industry is not as tuned to being capital intensive. This is something that has severely restricted IT firms from expanding and driving growth and profits.


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