- 9 out of 12 sectors including Metals and Mining, Oil and Gas and Pharmaceuticals observed an increase in days of inventory
- 69% companies extended their payables to offset the effects of the pandemic on working capital
- Automobiles, chemicals, and cement and building products are the sectors which experienced maximum improvement in working capital management
India, 19 April 2021: The significance of working capital has exponentially increased with the COVID-19 pandemic impacting cash cycles across sectors. In the 12 months ended 30 September 2020, businesses in India saw an increase in the cash to cash cycle by 6 days year on year, as per the ‘EY All Tied Up Working Capital Management report 2021’. The study highlights that businesses in India have an opportunity to free up to ₹5.2 trillion tied up in working capital, which can help businesses rebound much strongly from the crisis.
The pandemic induced lockdown resulted in increased inventory balances and reduced collections for companies. Prudent companies resorted to the strategy of extending payables in order to manage disruption and preserve cash. Large and medium enterprises continue to be more efficient in managing their working capital requirements. Higher bargaining power combined with effective business processes to manage working capital for large businesses resulted in a working capital cycle of 29 days shorter than the small enterprises.
The report also highlights that the technology sector saw increased activity as companies accelerated digital investments to support business continuity during the pandemic. The enhanced digitization by businesses led overall increase in revenues for the technology sector, thus driving down the cash to cash cycle for majority of companies (c.63%).
Naveen Tiwari, Partner and Head, Working Capital Practice, EY India, said “While it can be observed that certain sectors and companies adopted focused strategies to optimize working capital during the pandemic, there remains much scope for improvement. There is a greater need to view working capital optimization as a holistic strategy that can support profitability improvement efforts across the organization.”
Key highlights from the EY All Tied Up Working Capital Management report 2021:
9 out of 12 sectors saw an increase in days of inventory (DIO)
A reduced demand of goods due to the pandemic induced lockdown caused inventory overstocks for non-essential goods, while companies took time to re-adjust their production levels as per the lockdown demand. While pandemic has affected all aspects of working capital, it can be observed that majority of sectors observed an increase in DIO during the period. 9 out of 12 sectors considered for the analysis saw an increase in DIO, indicating more inventory holdings and slower turnover. Significant increase in DIO was observed for the Metals and Mining sector, closely followed by Oil and Gas, and Pharmaceuticals sectors.
Businesses stretched their payables to manage working capital during the pandemic
Businesses have tried to balance their working capital requirements by increasing payables, to offset increased inventory balances and reduced collections. As per our analysis, 69% businesses in our sample set improved their payables cycle in the 12 months ended 30 September 2021, when compared to the LTM performance.
Small enterprises have seen the biggest impact of the pandemic on working capital performance
As compared to the small enterprises, large and medium enterprises have seen a smaller impact of the pandemic on their working capital performance. Large enterprises had a working capital cycle shorter by 29 days as compared to small enterprises as a result of better processes to proactively track, control cash and working capital.
Some sector companies were able to proactively manage their working capital
While most companies faced a challenge to manage their working capital effectively during the pandemic, some sectors were able to proactively adjust the operations to preserve working capital.
Sectors such as automobiles, cement and building products and chemicals took steps to realign their working capital strategies as per the pressing needs posed by the pandemic. Largest improvement was observed in the automobiles sector with a reduction of 13 days in the cash to cash cycle, closely followed by an improvement of 12 days in the chemicals sector and 7 days in the cement and building products sector.
The pandemic has had a significant impact on India Inc’s cash, liquidity and working capital. There continues to be a significant need for companies to improve their working capital practices by adopting a tailored and structured approach to working capital optimization. Businesses need to leverage emerging technologies and data analytics with effective governance mechanisms to drive business decisions and optimize overall cash and working capital. Innovative technology solutions can help in optimizing cash flows through automating internal processes, preparing accurate cash-flow forecasts and improving real time access to information. Working capital management should not be viewed only as a financial best practice, but rather as a holistic strategy to improve efficiency and profitability across the organization.
About the Survey methodology
The EY All Tied Up Working Capital Management report 2021 is a publication in a series of Working Capital management reports based on analysis of Working Capital performance of the largest 500 companies as per revenue as listed in the BSE Stock Exchange. Performance comparison has been done for financials as on 30-Sep-2020 as compared to financials as on 30-Sep-2019.
Companies in the financial and real estate sectors have been excluded from the analysis for comparability reasons. The sector analysis includes top 12 sectors consisting of over 90% of the revenue of the sample set. For the purpose of size segmentation, the rank ordered data set has been divided into 3 groups as per percentiles, using FY20 revenue as an indicator of size for each company.
Notes to editors
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