India Inc. has INR 1.8 lakh crore of cash trapped in their balance sheets: EY Report

According to the annual EY report, Working Capital Management - Are you leaving cash on the table? India Inc. has the potential to release INR1.8 lakh crore of cash trapped in the corporate balance sheets. 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.

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.

The cash conversion cycle for larger companies (top one-third by revenue) is significantly lower than for smaller companies (bottom one-third by revenue). Larger companies have better negotiating leverage and operating efficiencies, thus driving improved collections and relatively lower inventory levels.

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.

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 says, "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. Technology, as well, plays a key role in driving working capital optimization in several ways, such as by providing real-time and clearer insights on working capital position, enabling better decision-making."

The transition from the old tax structure to GST initially impacted the working capital cycle of companies. Firms with strong working capital management are expected to see over the short-term disruption better than firms with lesser focus on cash management. GST can prove to be both a challenge and an opportunity to effectively manage working capital.

There has been a significant increase in stressed assets, which has led to a decline in fresh lending. Lending from banks to Indian corporations declined by 5.2% in FY17 as compared to a growth of 2.8% in FY16, which has had an impact on both short and long term financing. Alternative funding solutions such as corporate bonds and commercial paper have emerged as short-term funding instruments. Other sources, such as channel financing are undergoing significant change as FinTechs firms are developing technology platforms that are intended to help MSMEs sell their receivables at a discount, thus freeing up cash for operational needs.

The report is an analysis of findings from working capital performance of the leading 500 companies (by sales of FY17) headquartered in India.

Source : Equity Bulls

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