The Hindu Business Line : MNCs see surge in free cash flows

The free cash flows of the Indian arms of 70 multinationals have more than doubled in the just-concluded financial year, from Rs 1,830 crore to Rs 4,450 crore.

In the preceding year, their free cash flows had dipped by 25 per cent. Free cash flow is the cash churned out by a company's operations, after funding its asset purchases. A larger cash chest can be used either to pay out higher dividends or to fund expansion, aiding growth.

MNCs have also pumped up cash at a much higher rate than their profits. Free cash flows for the MNCs grew by a whopping 143 per cent in 2003, but their aggregate profits edged up by a mere 20 per cent. Pruned-down working capital requirements appear to have helped many of these companies increase their cash flows, even as profits rose more sedately.

MICO, GlaxoSmithkline Pharma, Nestle India and Cadbury India are among the major contributors to the surge in cash flows this year, due mainly to their restructuring measures.

GSK Pharma, which saw its free cash flows surge from Rs 123 crore to Rs 393 crore in 2003, appears to be reaping the rewards of restructuring measures it initiated in 2002.

The company has downsized its workforce through a VRS, rationalised its sales force and decided to focus on just 30 of its top performing brands out of a basket of 250.

MICO's free cash flows improved by a whopping Rs 433 crore in 2003, topping the expansion in profits from operations which added Rs 182 crore during the year.

The company has freed up substantial cash through lower inventories and better working capital management; though lower capital expenditure also helped.

Turnaround companies such as Bata, Siemens and Timken India, whose operations stopped guzzling cash and turned cash-positive, in fact made a big difference to the numbers.

Many of Bata's restructuring moves over the past year were actually targeted at its cash flows.

Over the past year, Bata has transformed some of its wholesalers, who earlier got credit, into cash-and-carry stores. Clearance sales, which trimmed pipeline inventories, also unlocked cash.

Free cash generation does appear to be one of the factors that drive stock valuations. Between April 2002 and April 2003, a period when cash flows slumped, MNC stocks lagged the broad markets.

MNC stocks also stayed marginally behind the broad markets as they recovered in 2003-04.

But MNC stock prices have held up well post-April, when the markets went into a tailspin.

Stocks of companies such as MICO, Bata India, Fulford, Aventis Pharma, Siemens and Esab India, which have seen a sharp improvement in cash flows, have outpaced the markets by a big margin in 2004.