The Hindu Business Line : As treasury incomes shrink — Cash-rich companies head for cover

AS a conservative investor parking your savings in bonds, you may be feeling the pinch of dwindling returns. You are not alone. Some of the country's most affluent companies such as Hindustan Lever, Infosys, VSNL and ITC, who park their large cash-chests in debt instruments are in a similar predicament.

Debt and gilt funds, in which some of these companies have traditionally invested, have turned in negative returns in the first quarter of 2004, after returning 13 per cent to15 per cent in the preceding two years. Interest rates have hit a nadir in 2004 and the trading gains, which helped debt funds notch up scintillating returns over the last two years, have evaporated.

Hindustan Lever, with an investment book of Rs 2,500 crore, took a hard knock on its profits in the March quarter, after its treasury income plunged by 50 per cent. The company had made a killing on its treasury operations over the last two years, by trading on long-dated gilts and bond funds, whose prices rose steadily even as interest rates plunged.

But HLL admits that such a strategy may not work going forward. "Trading gains from debt instruments may be limited as interest rates have flattened out," said HLL. The treasury heads of conservative companies have responded by heading for cover.

They are switching their cash surpluses either into floating rate funds — which are expected to benefit if interest rates move up, or liquid and cash funds — which invest in money market instruments. These are less sensitive to a spike in interest rates, than are bond funds packed with long-term bonds. "Our asset allocation reflects the flexibility required in the current context of low interest rates," said HLL.

Over the past six months, HLL has invested in Templeton Floating Rate Fund and liquid/cash management funds from Birla and Alliance mutual funds. Hindalco has been an avid investor in floaters. And ITC has parcelled out investments between cash and liquid funds from Principal, Alliance, Birla and HSBC funds.

"Corporate treasuries are now focused on de-risking their debt portfolio. Flexibility and safety are the priority, rather than returns," comments Mr A. Balasubramaniam, Head- Fixed Income, at Birla Sun Life Mutual Fund. He confirms that corporate treasuries are stepping up investments in liquid, short-term and floating rate products.

In contrast, companies which were earlier content to park their entire hoard of cash in "ultra-safe" bank term deposits, are turning to mutual funds to earn a little extra from their investments. Infosys Technologies, which earlier deployed its cash only in bank and inter-corporate deposits; has plunked the lion's share of its cash flows in 2004 in liquid mutual funds. Its books show a new investment of Rs 929 crore in liquid funds, by end of 2003-04. VSNL and Maruti Udyog, whose cash surpluses lay mainly in bank deposits last year, have also invested in mutual funds over the past six months.

Companies, which have some appetite for risk, are however, doing exactly what individual investors have done. They are seeking to participate in the stock market boom, by investing directly in equity funds or in the monthly income plans, which invest up to 10 per cent in equities.

Mr Balasubramaniam points out that this strategy could still keep your investments quite safe. He said, "An MIP with a 5 per cent allocation to equity could generate a 3 per cent return, even if the equity markets plunge by 30 per cent." But, companies such as L&T seem to be comfortable deciding their own asset allocation. Over the past six months, L&T has picked up exposures in a range of diversified equity funds, with HDFC Top 200 Fund, Kotak MNC Fund and Deutsche Alpha Equity Fund, among its key choices.