There was a call with management and I happen to attend the call. There was doubt from analysts regarding huge receivable days. There is concern on receivables management. I went to drawing board to do analysis of the stock on this aspect.
As per my finding, most of the cleanups were done in year 2012. The whole balance sheet was cleaned with written off from share premium account.
In Year 2013, 4.41% of sales turned as bad debt. Company wrote it off.
In Year 2014, 1.06% of sales turns as bad debt. Company wrote it off.
In Year 2015 & 2016 no bad debt written off. Company is able to collect all sales proceed.
Why this company had big debt write offs. It may be due to they way business deals were done. Earlier deals were done thru System integrator. If you sign a deal with a system integrator, it will have impact on your receivables. You may not get the payment if system integrator has not done good work . You cannot claim money from the customer since you are not visible. System integrator's in India are known for naughty
This is how contracts are structured in IT product company. It is based on milestone.
On signing contract:- 10%
Alpha - 20 %
Beta - 20%
Gold - 40 %
Post Support - 10%
Payments are generally done in 60 - 90 days cycle from large firms. Now if you have direct contract, you will get money after 60 days from date of invoice. If you are having contract with system integrator, you will get 30 - 60 more days of delay in payment. Generally system integrator will pass on money after getting from customer. Which adds to delay.
Since the payments are based on milestone, most of the milestones get delayed in IT delivery for reasons best known to God.
Now since contracts are direct, company should be able to get money faster.
Other aspect to note from the call is that companies gives service on its own product. They are not into generic service business, so service business is not captive and predictable like other service companies. This risk comes with reward of revenue not attached with staff strength.