India Inc, which is struggling with stressed assets, has the potential to release Rs 1.8 lakh crore of cash trapped in the corporate balance sheets, a report has said.
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 percentage points 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,” said the annual EY report on working capital management.
The cash conversion cycle for larger firms (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,” the report said.
It said 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, EY report said.
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 per cent in FY17 against a growth of 2.8 per cent in FY16. “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 fintech firms are developing technology platforms that are intended to help MSMEs sell their receivables at a discount, thus freeing up cash for operational needs,” it said.
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 firms and higher inventory levels for Indian auto parts companies predominantly drove a longer cycle compared to other developed regions across these sectors,” it said.
Naveen Tiwari, partner and leader, EY India said: “In current times, managing cash and liquidity effectively is imperative given the increase in NPAs and ballooning corporate balance sheets. Further, GST, tech advancements and alternative sources of debt-funding are providing firms with an opportunity to rethink their approaches toward resourcefully and most effectively managing their working capital.”