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IT majors See Little improvement

After keeping a tight leash on collections during the global downturn, the Day Sales Outstanding (DSOs) position for the top three Indian IT services companies either increased or stayed flat for the quarter ended June 2010.

DSO position reported by top rung IT vendors in Q1FY11 shows that both Infosys and Wipro saw debtor days rise in June quarter, compared sequentially and to the year ago period.

India’s largest IT services company, TCS, reported a flat DSO position on a year-on-year basis, but higher when compared to March quarter.

However, market watchers are not worried about June DSO metrics, as many attribute it to the spike in invoicing volumes in Q1 as also the rising share of fixed price contracts in the overall business kitty.

DSO or debtor days refer to the ratio between accounts receivables and revenue. Simply put, it is a measure of the time taken for service providers to get customers to make the payment for services rendered.

Thus, a low DSO figure means that it took the company fewer days to collect accounts receivables.

The DSO comparison (see table) is not necessarily to pit one vendor’s debtor days against the other, but to compare each company’s June quarter metrics with their previous performance.

“There are a lot of factors that can impact DSOs, including the fixed price mix. Even though there may not have been any improvement in the DSO position for June quarter, I would not worry…it is not as if working capital is getting blocked on account of debtor days,” said Mr Harit Shah, an analyst with brokerage Karvy Stock Broking.

For TCS, the DSO stood at 77 days in June quarter (against 71 days in March quarter and 77 days in the year ago period) attributed largely to significant growth in invoicing.

“DSO conveys the volume of invoicing relative to the total sales and the rise in DSO has been on account of spike in volumes. In the case of TCS, close to 81 per cent of accounts receivables are less than 45 days. These invoices have been generated in the latter half of June quarter and would already have been collected,” a source said. In just-concluded quarter,

TCS saw volume growth of over 8.1 per cent.

For Infosys, the debtor days came in at 60 days against 59 days in Q4FY10 and 56 days for Q1 FY10.

For Wipro, it was pegged at 65 days for Q1FY11 versus 61 days in Q4FY10 and 60 days for Q1FY10.

“As of June 30, 2010, our day sales outstanding was at 65 days due to increase in unbilled revenue, 78 per cent of our debtors are less than 30 days and less than one per cent is more than 180 days,” Wipro’s Chief Financial Officer, Mr Suresh Senapaty, had said at a earnings conference call with analysts recently.

A company insider attributed the increase in unbilled revenue to fixed price contracts where the ratio between effort and billing is not fully co-related.

In other words, while the revenue may be recognised based on percentage completion method in such contracts, the payment becomes due only when certain milestones are reached.