Survival of the Fittest

Survival of the Fittest

Companies with low financial liabilities and high liquidity on their books have better chance to tide over the coronavirus-triggered deep slowdown

Illustration by Raj Verma Illustration by Raj Verma

It was 1991. The P.V. Narasimha Rao government had just announced the economic liberalisation policy, and top industrialists were scouting for investment opportunities. Rahul Bajaj, Chairman of Bajaj Auto, would often get calls to diversify into businesses the government had decontrolled. But Bajaj was not ready to leverage the auto business to build a power or a cement plant. He wanted to build Bajaj Auto into a leading global automaker, instead of investing in other sectors.

Bajaj was not alone. He was among a number of industrialists who resisted foraying into new businesses, despite prospects of attractive returns.

It is these businesses that appear to be better placed as coronavirus-triggered lockdown clogs cash flows. In general, they have lower debt - some even zero financial liabilities - and surplus cash on books to service loans, if any. Of the 371 non-BFSI (banking, financial services and insurance) companies in the BSE 500 index, there are 32 zero-debt companies and 108 companies with cash and bank balance higher than the gross debt (long- and short-term borrowings), according to the latest half-yearly consolidated data available with Ace Equity.

Information technology (IT) giants Infosys and Tata Consultancy Services (TCS) are the toppers in financial discipline with zero debt on their books and cash and bank balance of over Rs 16,000 crore. Considering the high net cash -calculated by deducting consolidated debt from cash and bank balance - gold and diamond jewellery manufacturer Rajesh Exports (with a net cash of Rs 12,222 crore), Ambuja Cements (Rs 9,319 crore as on December 2019), InterGlobe Aviation (Rs 9,081 crore) and Wipro (Rs 8,687 crore) are also better positioned to weather the downturn. Coal India tops the list of cash-rich public sector units (PSUs) with net cash of Rs 31,640 crore.

So, it's all about sticking to the beaten path and doing what you understand best. Bajaj had diversified into non-banking financial services a decade back, but he expanded the automobile financing subsidiary in Bajaj Auto to create Bajaj Finance. In September 2019, Bajaj Auto had net cash of Rs 570 crore and reserves and surplus of Rs 23,400 crore on its books.

Besides Coal India, there are quite a few PSUs in the list of net cash-rich companies, including NBCC (India), Petronet LNG, NMDC Ltd, RITES and Engineers India.

Companies focused on creating sustainable capacities have better chances of survival in an unprecedented situation like the one currently playing out. InterGlobe Aviation's IndiGo, for instance, stuck to low-cost, single-class model unlike its rivals Jet Airways and Kingfisher Airlines. It maintains a relatively young fleet by selling and leasing back planes. The airline rewrote industry standards through simple steps such as low turnaround time - the time taken for readying a plane for the next flight between landing and take-off - and lean workforce. Promoter Rahul Bhatia's obsession with technology also helped the company reduce the cost of operations as he introduced digital tools for alerting movements to the ground staff. InterGlobe Aviation had cash and bank balance of Rs 9,703 crore as on September 2019, as against employee cost of Rs 3,564.5 crore and interest cost of Rs 1,388 crore for April-December 2019.

If IndiGo is Indian aviation's success story, diversified business conglomerate ITC, with Rs 3,778 crore net cash, has also done well. ITC's flagship cigarette business has been facing societal challenges for a long time. So, the company diversified into hospitality and fast-moving consumer goods (FMCG). But it also preserved cash, which is almost equivalent to its employee cost for one year. In contrast, most domestic infrastructure and manufacturing companies such as Tata Steel, Reliance Industries, JSW Steel, Vodafone Idea and Tata Motors are burdened with heavy debt.

So, it boils down to cash flows and reserve positions. Since cash flows have reduced, servicing loans will become tougher. To counter this, companies will have to drastically slash expenses - raw material costs and salary and fuel bills. The high debt companies will have to suspend expansion, acquisition and diversification plans. Industry leaders are now asking banks to restructure sector-specific loans, especially those hit hard by Covid-19.

Tata Steel had a consolidated debt of Rs 1.1 lakh crore, and financing cost of Rs 7,660 crore, in FY20. The situation at another Tata group company, Tata Motors, is different since it has an auto financing subsidiary under its fold which accounts for a large portion of the debt. The struggling automobile company has a consolidated debt of Rs 1.29 lakh crore.

Reliance Industries Ltd (RIL) is in huge debt, but has enough cash and cash equivalent. Its consolidated debt is around Rs 3.06 lakh crore, while cash and cash equivalents are around Rs 1.54 lakh crore. It reported a cash flow of over Rs 90,000 crore in FY20. JSW Steel has Rs 50,000 crore debt, while Vodafone Idea has Rs 1.16 lakh crore.

Usually, multinationals are better in conserving cash, says the managing director of an investment firm. "They experience regional business casualties often, which forces them to instruct subsidiaries to follow strict financial standards across geographies," he adds.

Swiss multinational LafargeHolcim's group company ACC has a net cash of Rs 4,647 crore. ACC's employee cost was Rs 633 crore for nine months of CY19, while interest cost was Rs 57 crore. But another group firm Ambuja reported employee cost of Rs 1,160 crore and interest outgo of Rs 116 crore during the period. The Indian arms of the two German engineering giants - Siemens and Bosch - are also keen on preserving liquidity. Siemens has Rs 5,001 crore net cash on its books, while Bosch has Rs 1,715 crore. Both have zero debt.

Other players with reasonable net cash for immediate survival include Eicher Motors, Whirlpool Of India, Havells India, GlaxoSmithKline Pharmaceuticals and Bata India. Siddhartha Lal's passion to turn around Royal Enfield in the 15 years is still driving the fundamentals of Eicher Motors, which has a net cash of Rs 2,802 crore. In April-December 2019, salaries and interest costs added up to Rs 600 crore.

Raising capital for meeting fixed costs may be difficult now. Companies are aggressively announcing fund-raising plans as interest rates have become lower. Tata Sons, the holding company of the Tata group, is in talks with global banks to arrange a $1 billion revolving credit facility or RCF - a type of loan that provides the borrower the flexibility to withdraw, repay and withdraw again - to recapitalise some of its key businesses in Europe, including Tata Steel Europe and Jaguar Land Rover. Separately, Tata Steel has approved allotment of non-convertible debentures (NCDs) worth Rs 510 crore on a private placement basis. Auto major Mahindra & Mahindra (M&M) has raised Rs 1,000 crore through NCDs. The board of Kotak Mahindra Bank has approved a share sale to raise over Rs 7,000 crore. Pilani Investment & Industries, the holding company of some of Aditya Birla group firms, is raising Rs  1,000 crore by issuing commercial papers. Reliance Industries has mopped up Rs 8,500 crore from the sale of NCDs. The companys board has given an approval for raising up to Rs 25,000 crore.

Since January, when Covid-19 reared its ugly head, most companies have seen their share prices fall by 20-25 per cent. Very few have managed to escape the bloodbath. One example is electronics major Havells, which fell just 7.8 per cent till April 15. TCS and Infosys fell a little less than 20 per cent, when the benchmark Sensex fell 25.7 per cent. Between mid-February and March 23, the Sensex plunged 37 per cent. It has, however, started recovering since then.