Negativity takes toll of cash reserves at India Inc!

Rohit Joshi and Siddharth Tak/Zee Research Group/Delhi

As against a 23 percent growth during 2011-12, Sensex companies witnessed only a six percent growth in their cash reserves during 2012-13.

This comes in the wake of all round depressing macro economic data on the ground.

Amid economic slowdown, Sensex companies (index has 30 companies) have piled Rs 2.67 lakh crore cash reserves during 2012-13, registering around six percent growth over last fiscal.

The depressed growth in cash reserves is accounted for by two key developments: poor profitability and the mounting insecurity in regard to deploying cash elsewhere. A Zee Research Group (ZRG) study of the balance sheets of Sensex companies showed that at the end of last fiscal (31st March 2013), out of remaining 26 companies in Sensex (excluding SBI , ICICI Bank, HDFC Bank , HDFC Ltd.) 19 ( 73 percent) have witnessed a jump in cash levels when compared to 31st March 2012 levels. The banking companies were excluded for the study in view of their stipulated liquidity requirement.

During the last one year, Hero Motocorp has seen the maximum jump of around 136 percent in cash levels followed by GAIL (112 percent), Cipla (91 percent), and Dr Reddy’s (53 percent).

Furthermore, IT firms which generally are cash rich have sustained the trend this fiscal as well. Cash levels of IT companies like TCS, Wipro, and Infosys have increased by 16 percent, 9 percent, and 6 percent respectively.

Explaining the rationale behind the lower growth of cash reserves in 2012-13, DK Pant, chief economist at India Ratings said, “Corporate profitability has taken a hit amid the weak economic scenario and hence cash reserves growth is unable to keep pace with earlier levels. Furthermore, companies are not spending the cash lying on the balance sheet as the investment activity is not taking place in the economy.”

In sync with the view, AK Purwar, industry expert and former chairman of SBI said, “Profitability of operations is somewhat lower and in some cases it is negative. Furthermore there is weak demand prevailing in the market and it is not growing in comparison to earlier periods. For instance auto companies are having huge inventory on their balance sheets and the inventory carrying cost which indirectly impacts the balance sheet is 20 percent plus. This has hit the cash accruals and bottom line of auto companies.”

Purwar’s thought got an endorsement from Avinash Gorakshakar, Research head, who averred, “Most of the corporate have actually used their cash accruals in funding their rising working capital requirements. In case of auto sector working capital is the main culprit. Many auto companies are giving higher time to customers to pay up and suppliers are not giving them higher credit so obviously cash is used to fund the working capital requirements. Some Sensex companies have also used their cash to fund their ongoing capacity expansion plans.”

Commenting on the future trend of cash reserves, Pant at India Ratings predicted, “One cannot be too sure of the future trend as it depends on two factors. We foresee economic growth of 6.1 percent in FY14 over 5 percent growth in last fiscal. Furthermore, some positive export growth witnessed in January-April period gives an indication that global demand is stabilizing. Along with that commodity prices are falling, finance cost will reduce due to lower interest rate and this will certainly have some positive impact on the profitability. But if investment revival takes place which we are saying will not be very strong then cash accrual position in the balance sheet will change accordingly.”

For efficient deployment of the existing cash pile, Purwar suggested, “The investment activity is in a bad situation and from here on position should improve. Companies having cash should start investing as the economy has bottomed out or you can say it is very close to the bottom.”