India’s leading 500 businesses to need over INR 1.7 trillion to finance working capital

New Delhi, 07 February, 2015

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If companies continue to grow even at a modest rate of 5% each year, India’s leading 500 businesses would need over INR 1.7 trillion to finance working capital and incremental capital expenditure over the next three years, a latest report from EY - ‘All Tied Up India’ has said. The report is based on an analysis of the working capital performance of 500 leading companies in India and has assumed a relatively modest growth rate of 5% to arrive at the capital requirements.

The report reveals that while these businesses recorded a continued decline in sales growth, rise in debt levels and a fall in ROCE (Return on Capital Employed), they registered a slight improvement in margins in 2013-14. Companies continued to actively explore possibilities of releasing cash by optimizing balance sheets, with a focus on enhancing their financial position, supporting operational cash flow-related demands and addressing committed or essential capital expenditure.

The rising NPAs of PSUs and increased scrutiny by most banks with regard to their funding of businesses has made it difficult for businesses to raise capital. However, the EY report reveals that up to INR 5,300 billion (US $97 billion) of excess capital, which is equivalent to 12% of their aggregate sales, remains unnecessarily tied up in working capital processes of leading Indian companies, which could help them address their requirements.

The EY report highlights that businesses that managed their working capital better had much better financial indicators than businesses that were not as good at managing it. Therefore, working capital is a significant indicator of well managed companies, who are able to better manage debt, maintain leaner operations and monitor their cash flow. The top WC performers reported cash-to-cash of 15 days and achieved an EBITDA margin of 14% and a ROCE of 9%, with a debt to equity ratio of 0.9. In contrast, the bottom WC performers reported higher cash-to-cash of 59 days, while achieving a lower EBITDA margin of 10% and ROCE of 8%, with a higher debt to equity ratio of 1.6.

Says Ankur Bhandari, Partner Working Capital Advisory Services, EY, “Despite some gains achieved in few pockets, corporate India needs to focus more on capital efficient models for competitive advantage. Efficient working capital management is not the job of finance functional alone. Entire operation needs to actively contribute to achieve success with support and drive from the leadership team. Moreover, the process of improving working capital will also highlight opportunities in areas such as procurement, conversion, warehousing & logistic costs apart from selling, general and administrative expenses.

The EY report suggests that companies need to effect changes in the management of their working capital in a sustainable way to avoid losing on any gains achieved. An analysis of the cash-to-cash performance over the three consecutive years revealed that only 19% of the companies were able to sustain y-o-y cash-to-cash improvements. Businesses that persisted with continued improvement stand to benefit from a capital efficient business model that gives them a competitive advantage.

Over last year, cash-to-cash cycle or the average number of days for profit to be converted to cash improved by 6%. Despite this marginal improvement, the analysis reveals that compared to the US, European, Japanese and other Asian companies, Indian organizations are at the bottom of cash-to-cash performance. While these performance gaps may be partly explained by variations in market characteristics, payment practices and supply chain infrastructure, they also highlight fundamental differences in the degree of management focus on cash and the effectiveness of working capital management processes.

The report makes multiple recommendations that could help companies in India more effectively address their working capital requirements. As part of their operating strategy, companies would need to integrate processes across businesses subsequent to an acquisition, engage in improved payment terms with suppliers, and assess setting up of unified shared services infrastructure. The report also highlights the importance of enhanced supply chain management by efficient allocation of supply chain resources and deploying of robust risk management policies across the organisation. Other key recommendations stress on the need to maintain an equitable approach to balancing cash, cost and service levels.

Notes to Editors

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