Working capital management 2014: all tied up India

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Indian companies should focus on implementing truly effective WC management strategies to raise cash and improve their operational efficiency, reveals our latest in a series of working capital (WC) management reports based on EY research.

Key challenges

  • India’s economic growth rate fell to 5% in FY2013 — the lowest figure in a decade.
  • The Indian rupee depreciated by 13% (against the US dollar) in the first half of FY2013 and closed at 7% lower on March 2013 than in March 2012.
  • A review of the sales performance of the leading 500 companies in India during FY2013 reveals that sales growth halved during the year and EBITDA/sales declined by 0.8% compared to the previous year.
  • Indian companies’ WC performance in 2013 indicates a slight improvement, with their cash-to-cash (C2C) dropping by 2% from 2012.
  • The top 500 companies in India have a total debt of INR19 trillion, which went up sharply in 2013 as compared to 2009.
  • Indian companies have up to INR5.3 trillion (US$97 billion) in cash tied up in their WC processes. This is equivalent to 12% of their aggregate sales.
In India, WC performance among the leading companies during 2013 improved marginally as compared to 2012, with their C2C dropping by 2%.

Key working capital results

Change in WC metrics, 2009-2013 and 2012-2013 (including the O&G and M&M sectors)

India

2013

Change 13/12

Change 13/09

DSO

44

0%

12%

DIO

48

-3%

8%

DPO

43

0%

-1%

C2C

49

-2%

21%

Change in WC metrics, 2009-2013 and 2012-2013 (excluding the O&G and M&M s ectors)

India

2013

Change 13/12

Change 13/09

DSO

66

3%

13%

DIO

53

0%

2%

DPO

52

5%

4%

C2C

67

-1%

11%

Sector-wise performance review

In 2013, there were wide divergences in the WC performance of various sectors. The biggest improvements in WC have been witnessed in electric utilities, pharmaceuticals and steel.

WC changes among major sectors, 2009-2013 and 2012-2013

Major sectors

C2C change

Major sectors

2013/2012

2013/2009

Auto parts

2%

13%

Building materials

6%

24%

Chemicals and fertilizers

17%

39%

Electric utilities

-12%

111%

Food producers

1%

12%

Oil & gas, Metals & mining

-2%

94%

Pharmaceuticals

-10%

-10%

Steel

-14%

2%

Telecommunications

6%

27%

Source: EY analysis, based on publicly available annual financial statements

Regional and country-wise performance review

Compared to their peers in the US, Europe, Japan and other Asian countries, Indian companies continue to be at the bottom of the WC performance table. Possible causes for gaps in WC performance in India are:

  • Sector bias
  • Payment practices
  • Supply chain infrastructure
  • Focus on cash and efficiency of processes

Current WC metrics by region and country, excluding the O&G and M&M sectors, 2012−2013

 

India

US

Europe

Japan

Asia*

DSO

66

40

53

68

46

DIO

53

32

34

42

40

DPO

52

30

46

53

47

C2C

67

42

41

57

39

 

DSO - DPO

14

10

7

15

-1

* excluding India and Japan
Source: EY analysis, based on publicly available annual financial statements

Opportunity for improvement

Most Indian companies struggle to manage profitable growth with optimum WC investment. The wide variations in WC performance between different companies in each sector point to significant potential, with up to INR5.3 trillion (US$97 billion) of cash for the leading 500 Indian companies.

Current WC cash opportunity

  Cash opportunity
Region Value Percentage of WC scope* Percentage of sales
Average Upper quartile Average Upper quartile Average Upper quartile
India INR2,700b
(US$50b)
INR5,300b
(US$97b)
16% 32% 6% 12%
Europe €290b €490b 11% 19% 4% 7%
United States US$360b US$660b 12% 21% 3% 6%

*WC scope = sum of trade payables, inventory and receivables
US $1 = INR 54.31 ( currency conversion rate as on March 2013)
Source: EY analysis, based on publicly available annual financial statements

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