IT cos unfazed by rise in debtor days

Chennai: In difficult times, quicker collections from clients for services rendered could strengthen a company’s balance sheet.

A look at the day sales outstandings (DSOs) for top Indian IT services companies shows that they are taking longer to collect money from their clients for services rendered. Most of them feel that this has little to do with the overall poor global economic condition.

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Day sales outstanding (DSO), or debtor days, is the ratio between accounts receivables and sales. It is an indication of the time taken for service providers to get clients to pay up.

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The attached table shows that with the exception of Wipro, the top four have shown an increase in DSO either between the March and June 2008 quarters or year-on-year.

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Asked if it is becoming difficult to get clients to pay up on time, S Mahalingam, Chief Financial Officer, TCS, said, “Although our collection days have marginally increased, it has not been on account of a trend. Collection is no more difficult or easy than it was a year ago.”

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Rupee swings impact

He felt that days outstanding are also relationed to the rupee depreciation.

“DSO is calculated on the basis of outstanding amount against billing for 12 months.” Billing in FY2008 was done at an average rate of Rs 40 to the US dollar while debtors at the end of March would have been revalued at Rs 43.04.

“This has created a slight increase.” (In other words, when the numerator is multiplied by a larger number and the denominator is multiplied by a smaller number, the result is a larger figure.)

TCS has said that its DSO figure could be lower in future.

It now sees the billing exercise as a six-sigma exercise (a process methodology that improves processes such that given a million opportunities, only 3.4 mistakes are committed), according to Mahalingam.

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“Managers who interact with customers are part of an incentive scheme that has higher weightage for keeping DSOs low.”

Here is another way of looking at the DSO figure: Accounts receivables are evident at the end of a certain period while the revenues (against which they are compared) are accrued through the period. According to Mahalingam, “in a growth environment, that obviously results in higher DSOs.”

For TCS, the optimum level for DSOs is 70 days.

Infosys happy

Infosys seems happy with its figures. Its drop in DSOs between the March and June 2008 quarters is not due to any special effort from the company.

According to the Chief Financial Officer, V Balakrishnan, “some of the collections came in the first week of April 2008. If you factor in that, then the March quarter DSO would have been 67 days or so.”

He said that its DSO is the gross number including the credit period it gives clients.

“Normally, most customers have a credit period ranging from 30 to 45 days. If you exclude that then the DSO days could be around 35-40 days.”

This is the reason, he said, accounts receivables (AR) of less 30 days is close to 80 of total AR. Infosys prefers its DSO in the 65-75-day range.

Wipro, which has seen DSO figures stay consistent in the 65-67 range for about four quarters now, says it would continue to look for improvements but that it is happy with the current figures.

‘An aberration’

Satyam wants to bring it down from 93 to the 75-85-day range and feels that it should be able to do so in the next couple of quarters.

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