India Inc. has Rs 1.8 lakh crore cash trapped in their balance sheets: EY Report
, ET Bureau|
Mar 08, 2018, 07.00 PM IST
India Inc has nearly Rs 1.8 lakh crore of cash trapped in it balance sheet as working capital situation worsens on account of increase in inventory levels, a report by consultancy firm EY has found.
The cash conversion cycle has deteriorated by 4 percent from FY16, increasing by 44 days in FY17, the report has found. Sector such as Engineering, chemical and pharma have the longest cash conversion cycle.
The EY report titled Working Capital Management - Are you leaving cash on the table? That looked at findings from working capital performance of the leading 500 companies revealed that as the cash conversion cycle has increased and the operating cash flow deteriorated (by 0.7 ppts in FY17), there was a need to increase working capital funding, which has led to a significant increase in short-term borrowings. “he ability of companies to service debt (interest coverage) has been steadily declining over the years. This indicates a significant need to improve working capital management”, EY said.
However for larger companies cash conversion cycle is significantly lower than for smaller companies as the large companies have better negotiating leverage and operating efficiencies, thus driving improved collections and relatively lower inventory levels, the report explained.
EY found that the sectors such as oil and gas, and metals and mining displayed a significant increase in the cash conversion cycle days with a corresponding increase in short-term debt, signifying increased funding needs.
“In current times, managing cash and liquidity effectively is imperative given the significant increase in non-performing assets and ballooning corporate balance sheets. Further, the recent implementation of GST, technological advancements and alternative sources of debt-funding are providing companies with an opportunity to rethink their approaches toward resourcefully and most effectively managing their working capital”, said Naveen Tiwari, Partner and Leader for Working Capital Advisory Services, EY India
One of the biggest reason for the impact on working capital cycle of companies has been the transition from the old tax structure to GST. The transition from the old tax structure to GST initially impacted the working capital cycle of companies.
EY said there has been a significant increase in stressed assets, which has led to a decline in fresh lending. Lending from banks to Indian corporations declined by 5.2% in FY17 as compared to a growth of 2.8% in FY16, which has had an impact on both short and long term financing. Alternative funding solutions such as corporate bonds and commercial paper have emerged as short-term funding instruments.
The cash conversion cycle has deteriorated by 4 percent from FY16, increasing by 44 days in FY17, the report has found. Sector such as Engineering, chemical and pharma have the longest cash conversion cycle.
The EY report titled Working Capital Management - Are you leaving cash on the table? That looked at findings from working capital performance of the leading 500 companies revealed that as the cash conversion cycle has increased and the operating cash flow deteriorated (by 0.7 ppts in FY17), there was a need to increase working capital funding, which has led to a significant increase in short-term borrowings. “he ability of companies to service debt (interest coverage) has been steadily declining over the years. This indicates a significant need to improve working capital management”, EY said.
However for larger companies cash conversion cycle is significantly lower than for smaller companies as the large companies have better negotiating leverage and operating efficiencies, thus driving improved collections and relatively lower inventory levels, the report explained.
EY found that the sectors such as oil and gas, and metals and mining displayed a significant increase in the cash conversion cycle days with a corresponding increase in short-term debt, signifying increased funding needs.
“In current times, managing cash and liquidity effectively is imperative given the significant increase in non-performing assets and ballooning corporate balance sheets. Further, the recent implementation of GST, technological advancements and alternative sources of debt-funding are providing companies with an opportunity to rethink their approaches toward resourcefully and most effectively managing their working capital”, said Naveen Tiwari, Partner and Leader for Working Capital Advisory Services, EY India
One of the biggest reason for the impact on working capital cycle of companies has been the transition from the old tax structure to GST. The transition from the old tax structure to GST initially impacted the working capital cycle of companies.
EY said there has been a significant increase in stressed assets, which has led to a decline in fresh lending. Lending from banks to Indian corporations declined by 5.2% in FY17 as compared to a growth of 2.8% in FY16, which has had an impact on both short and long term financing. Alternative funding solutions such as corporate bonds and commercial paper have emerged as short-term funding instruments.
