Business Today

Building a Cash Hoard

India Inc is sitting on a huge cash pile, though its cash-generating capacity has been falling.
twitter-logoJyotindra Dubey | Print Edition: September 13, 2015
Building a cash hoard
Illustration: Ajay Thakuri

Cash is king" is an old saying in the corporate world. A company that just focuses on increasing revenues without enough cash generation can land in trouble. However, India Inc seems to be doing rather well on this front, notwithstanding the huge pressure on bottom lines.

Cash can flow into a company in the form of debt, equity or retained profits. The most desirable is free cash reserves that are accumulated by retaining profits. The BSE 500 companies (excluding banks and financial services companies) were sitting on a cash pile of Rs 16,15,480 crore as on March 2014, 11 per cent more than in the previous year. Though this growth rate was a five-year low, it was not bad if we consider that the top-line growth for the sample was just 8 per cent. The trend continues in 2014/15 as well. If we analyse 247 companies in the BSE 500 Index (excluding banks and financial services companies) which have released their annual reports for 2014/15, free cash reserves grew 12 per cent to Rs 9,58,281 crore year-on-year. This is much higher than the 2.3 per cent rise in top line during the period.

Cash Cows

One reason for this cash pile-up is the economic slowdown over the last few years that has made companies go slow on their investment plans. The company with most free cash reserves is Reliance Industries (RIL). It had free cash reserves of Rs 1,63,378 crore as on March 2015, up 13 per cent from March 2014. It added Rs 18,800 crore to its kitty in spite of the 15 per cent plunge in top line in 2014/15. Bharti Airtel is the next in line with free cash reserves of Rs 62,902 crore, 23 per cent more than in March 2014; it grew its top line by 19 per cent. Bharti is followed by Tata Steel with Rs 45,500 crore, Infosys Rs 44,660 crore and Tata Consultancy Services (TCS) with Rs 42,832 crore. Public sector enterprises usually stand out in this aspect. But we could not analyse their numbers as they are yet to release their annual reports for 2014/15.

Debt Worry

Close to 70 per cent companies we analysed had a surplus, that is, more cash than debt. RIL's free cash reserves are marginally more than the debt on its books. Bharti Airtel has a huge surplus. Infosys is debt-free while TCS has nominal debt on its books. Both have huge surpluses.

12% Rise in the free cash reserves of 247 companies in the BSE 500 Index

One fact that stands out is the worrying decline in the cash generating capacity of India Inc over the last few years. Net cash flow from operations of the sample fell almost 5 per cent in 2014/15. For RIL, cash flow from operations was just 9 per cent of income in 2014/15, down from 14 per cent in 2010/11. For Bharti Airtel, this worsened from 34.5 per cent to 29.5 per cent. Tata Steel saw the steepest fall. Its operating cash flow to income ratio was 25 per cent in 2010/11. This more than halved to 9.5 per cent in 2014/15. For Infosys and TCS, the ratio has been more or less stagnant since 2010/11.

But one has to be careful while analysing these data. "The aggregate data on cash accumulation can be misleading. The bulk of cash is with the top few companies (with negligible leverage). If we leave them out, the majority of Indian companies are suffering from high leverage. Their cash flow margins are suffering from low EBITDA and high interest expenses," says Deep N. Mukherjee, Senior Director - Corporates, India Ratings & Research.

If we look at the Reserve Bank of India data, the capacity utilisation of Indian companies is just 71 per cent due to muted demand. "The few companies which have adequate cash reserves thus lack any motivation to invest. The remaining set is not generating enough cash to expand."

The pharmaceutical industry added the most free cash reserves (up 16.2 per cent). It also saw a robust 37.4 per cent increase in net cash flow from operations. Its total income grew only 8.4 per cent. It was followed by FMCG and IT/ITeS sectors, which saw 15.5 per cent and 14.3 per cent increase in net cash flow from operations, respectively, in 2014/15.

The infrastructure sector saw a massive 60.5 per cent decline in net cash flow from operations. Its top line fell 3.5 per cent. The automobile sector's net cash flow from operations fell 25 per cent despite income rising by 7.08 per cent.

"In real estate, construction and power sectors, elongation of the working capital cycle has put pressure on operating cash flows. Also, in several cases, companies undertook huge capital expenditure anticipating that the demand growth seen in 2009/10 and 2010/11 would continue. Since the demand has turned for the worse, cash flows from these projects and consequently the ability of companies to service debt has gone down," says Prasad Koparkar, Senior Director, CRISIL Ratings.

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