Indian IT has reported strong growth over the past few decades led by a strong business model. Despite this, a relative indecisiveness has been seen towards capital allocation. Most of the capital employed is in cash (generates 7% returns), while ROICs stand at 40%+. Within large-caps, INFO has the weakest capital allocation with nearly 60% of capital employed in cash.

Over FY03-FY08, when Indian IT was pushing offshoring as a scalable model, conservatism was acceptable. However, even post 2008, as offshoring became main stream and India IT gained scale, the focus on re-investment has been limited.

This, we think, is hurting growth as Indian IT players have been slow in expanding into new geos/service lines and dependence on commoditized service lines remains high. Further, lower dividends have hurt shareholder returns - as reflected in the widening gap between ROICs and ROEs, said Religare Institutional Research.

A comparative analysis with global peers indicates that IBM has the most prudent capital allocation strategy, which ensures focus on higher incremental returns and redistribution to shareholders.

"We believe Indian IT now needs to focus on capital allocation to drive long-term growth and enhance shareholder returns," Religare added.

Our analysis indicates that even if Indian IT large-caps decide to earmark cash for acquisitions and wages (3-6 months), shareholder returns could be enhanced by 6-11%. Further, this could improve ROEs for Indian IT by 3-10%, it opined.

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