The overall cash-to-cash cycles for Indian Inc. deteriorated by 4 per cent in FY17 compared to FY16 and payables are being stretched to fund working capital requirements, finds an EY report. The report is an analysis of findings from working capital performance of the leading 500 companies (by sales of FY17) headquartered in India.
The working capital situation has worsened mainly on account of increase in inventory levels, which has resulted in an increase in cash conversion cycle to 44 days in FY17. India Inc. has the potential to release Rs 1.8 lakh crore of cash trapped in the corporate balance sheets.
As the cash conversion cycle has increased and the operating cash flow deteriorated (by 0.7 ppts in FY17), there was a need to increase working capital funding, which has led to a significant increase in short-term borrowings. Further, the ability of companies to service debt (interest coverage) has been steadily declining over the years. This indicates a significant need to improve working capital management, adds the report.
While there have been year-on-year variations, the overall cash-to-cash (C2C) cycle broadly remained stable between 2014 and 2017. According to the report, however, on closer inspection, there was a significant deterioration in receivables, which was countered by an almost equivalent increase in payables.
Large firms have significantly better working capital management with the difference between cash conversion cycles of large and small firms at 54 days.
Sectors such as oil and gas, and metals and mining displayed a significant increase in the cash conversion cycle days with a corresponding increase in short-term debt, signifying increased funding needs. Sectors like EPC (engineering, procurement, and construction), pharmaceuticals and chemicals recorded the longest cash conversion cycles in terms of days, highlights the report.
Compared to developed economies, Indian companies appear to have a longer cash conversion cycle, signifying opportunities to adapt better working capital practices, thus releasing trapped cash. Receivables for Indian EPC companies were more than two times those of companies in US, Europe and China. High collection period (days of sales outstanding) for technology companies and higher inventory levels for Indian auto parts companies predominantly drove a longer cycle compared to other developed regions across these sectors.
Naveen Tiwari, Partner and Leader for Working Capital Advisory Services, EY India said, "In current times, managing cash and liquidity effectively is imperative given the significant increase in non-performing assets and ballooning corporate balance sheets. Further, the recent implementation of GST, technological advancements and alternative sources of debt-funding are providing companies with an opportunity to rethink their approaches toward resourcefully and most effectively managing their working capital."
In order to create a robust working capital management system and utilize the latent opportunity, a strategic and disciplined approach needs to be taken towards process improvements aiming at lead time reduction, better customer engagement and improved vendor relations as they have a direct impact on reducing working capital, he adds further.