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Companies have seen a steady decline in cash flow from operations over the past five years, an analysis of the working capital cycle of BSE 500 corporations has revealed.
The median net working capital cycle increased to around 51 days in 2011-12 and further to 61 days in 2012-13 from around 40 days in 2008-2009, data compiled by India Ratings and Research – a Fitch Group company – has shown.
The working capital cycle measures the time lag between investment (by a business in a product or service) and the final receipt of payment (for that product or service).
According to the data, median inventory days (the period in which an item is placed in inventory pending sale), as well as debtor/receivable days (how quickly cash is collected from debtors), are at their highest levels since 2009.
This is quite normal in a situation where the overall economy is slowing. Weak demand and constant supply chain pressure are the reasons why inventory and debtor days are getting stretched.
The key driver behind this reduction in the working capital cycle, however, has been a sharp reduction in the payable/creditor days, which is a measure of how long on average a company takes to repay its creditors. This could be the direct result of systemic low liquidity levels and limited credit availability.
The data reveals that the working capital cycle has deteriorated significantly for 11 sectors — including textiles, engineering, auto ancillary, chemicals, fertilisers, metals and mining, power, cement, oil and gas, and consumer non-durables .
Non-durables pinch
On the other hand, the cycle has remained broadly stable or improved in the case of five sectors, including auto original equipment manufacture and retail companies, reflecting a stronger bargaining position.
Among the sectors that saw a worsening of working capital cycles, the consumer non-durables sector has been impacted the most, with working capital days rising to 38 days in 2012-13 from just four days in 2008-09. This is likely to have been on account of weak demand.
Consequence
In the case of textiles, firms experienced a sharp rise in inventory days, while for fertiliser, engineering, and metals and mining companies, the increase in the working capital cycle was due to a spike in receivable days. Other sectors saw their working capital days stretched by a sharp fall in payable days, which often reflects limited credit availability. One of the consequences of the slowdown in cash flow from operations has been that troubled sectors such as shipping, construction and infrastructure have been forced to tighten their working capital management, given the reduced availability of credit.
Besides weak demand and the high cost of capital, the capital expenditure plans of corporations too have taken a hit in FY’13 as a consequence of the 50 per cent rise in working capital days. The capex level for BSE 500 companies in fiscal 2013 is estimated at just 54 per cent of the 2011-12 levels. Coupled with this phenomenon, debt levels continued to increase, although at a lower pace.
The impact of working capital cycle deterioration is likely to be felt in the ongoing fiscal as well.
>arvind.jayaram@thehindu.co.in
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