Analysts see margin squeeze for firms

K. Raghavendra Rao Mumbai | Updated on March 13, 2018

The liquidity crunch is proving to be a double whammy for India Inc, say market-men.

On the one hand companies are waiting longer to realise their sales proceeds which mounts pressure on margins.

This raises questions on whether to grow or sustain the present level of sales.

In case, they resort to borrowings to keep sales growth on track, the higher borrowing cost will erode margins.

“We expect a 10 per cent decrease in the net profit of Nifty companies in the third quarter because of extension of credit periods,” said Mr Rajesh Agarwal, Head — Research, of Kolkata-based Eastern Financiers.


“Most of it has already been factored in the price. The Nifty corrected 23 per cent from its 52-week highs, with most stocks losing between 30 and 40 per cent,” he said.

The working capital cycle will get elongated by 30-40 per cent if a firm has to increase its credit line duration to customers from 30 days to 45 days.

“Yes, the credit period has increased from the earlier 30 days to 45 days and even 60 days in some cases,” said a DGM- sourcing of a large cement major.

“Given our size, we don't have liquidity related issues, but we have negotiated an increase in credit period with our suppliers in response to the average collection period that we are seeing from our customers.”

Surprisingly, liquidity and working capital cycles do not seem to be an issue for the Railways. “We pay our suppliers 15-30 days, after receiving material and inspecting them for quality,” said a senior official in-charge of purchase at West Central Railway.

“For large ticket purchases approved by the zonal purchase department, 95 per cent of the invoice value is paid against receipt of material and this takes two to four weeks.” Suppliers to Indian Railways agree. “Delays occur if there is a discrepancy in billing, non-fulfilment of purchase clause or delay in inspection of material,” said a railway contractor, adding that the railways do not negotiate for discounts or ask for more time to pay.

Published on December 12, 2011

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