Indian IT Sector Sees Cash Conversion Dip As Growth Remains Market Focus, Says HSBC

The Indian IT services sector experienced a notable decline in cash conversion during fiscal 2025, particularly among mid-tier firms. HSBC’s latest report highlights a broad dip in operating cash flow to Ebitda ratios, driven largely by increased receivables following a strong financial year 2024. On average, cash conversion dropped below the 10-year trend, raising concerns about earnings quality and operational efficiency.

Tata Consultancy Services Ltd., the sector leader, has seen a steady fall in cash conversion over the past five years—from around 84% in fiscal 2020 to 73% in financial year 2025.

Though still broadly in line with Infosys Ltd. and HCL Technologies Ltd. in free cash flow to revenues, the downward trend is notable. Infosys showed some recovery in fiscal 2025, while Persistent Systems Ltd. and Coforge Ltd. remain the weakest performers in terms of cash conversion.

Mid-tier companies fared worse than large-cap peers, with only Hexaware Ltd. and KPIT maintaining relatively strong cash metrics. Persistent issues with working capital and acquisitive strategies have contributed to weaker conversion rates among smaller players.

Despite these challenges, the market continues to place a higher value on growth than on cash generation. Historically, firms commanding valuation premiums either deliver strong margins and cash flows, like TCS, or high revenue growth, even with weak cash metrics, like LTIMindtree and Coforge. However, HSBC notes a subtle shift in investor sentiment, with more attention being paid to earnings quality—reflected in muted stock reactions to large deal announcements from Coforge and LTIM.

Capital allocation strategies further differentiate companies. TCS and Infosys have returned most of their surplus cash to shareholders through dividends and buybacks. HCL Technologies, once focused on acquisitions, has moved towards more investor-friendly practices.

In contrast, mid-tier firms such as Coforge and Persistent continue to pursue acquisitions, allocating significant cash towards M&A to sustain growth.

Looking ahead, HSBC expects another year of muted growth in fiscal 2028, partly due to US tariff uncertainties in the first half. While mid-tier companies may retain their valuation premiums due to higher growth expectations, sustained focus on earnings quality and cash efficiency could become more important to investors over time.

In summary, the Indian IT sector is at a crossroads, with declining cash conversion metrics prompting questions about long-term financial health, even as growth remains the primary driver of market valuations.