India Inc uses more funds to buy fixed assets

India Inc is flushed with funds — the coffer is brimming with a huge Rs 1,50,000-crore (ET July 17, ‘06) ready cash. Why not! Turnover has grown rapidly and margins have soared multiplying their cash generation as never before.

The question is: How are these funds used? The answer apparently is to acquire new assets. Improvement in macro fundamentals has made Corporate India far more confident this time around and it looks forward to a better future. It has undertaken major expansion and modernisation programmes to meet the growing demand in the future.

An ET survey of 100 large companies finds that their spending on fixed asset purchases has increased by 31.2% in ‘05-06 over ‘04-05. This accounted for 15.7% of the aggregate cash outflow (total of purchases of fixed assets, investment and repayment of loans, which account for the greater part of the cash outflow of the sample companies) last year — up by 0.7% point from 15% in the previous year.

A rise of 0.7% may not look very impressive, but then the aggregate cash outflow of these companies itself has grown by 25% during the period. In actual terms, the sample companies have spent Rs 7,496 crore more on fixed asset purchases last year over ‘04-05.

This was 19% of the additional cash outflow of the sample companiesduring the same period. Of course, the rise in asset purchases was helped by Corporate India’s recent move to slow down the repayment of outstanding debts. Only about 12.5% of the aggregate cash outflow of the sample companies was accounted for by loan repayments.

In actual terms, India Inc has spent only 3.2% more on loan repayments last year over the previous year. Incidentally, in the early part of the decade, the larger part of the cash outflow of India Inc was accounted for by loan repayments when the fall in interest rate had prompted them to retire the high-cost debt.

Take the case of Reliance Industries. The company repaid a huge Rs 15,272 crore loans in ‘01-02 over and above Rs 10,058 crore it had repaid in the previous year. Even in ‘04-05, Reliance repaid over Rs 10, 000 crore loans. In contrast, it spent only Rs 4,880 towards loan repayments last year.

Maybe Reliance’s debt obligation itself has come down over the years and it was not required to repay the same way. What is significant, however, is that as the debt obligation came down, it was in a position to spend a higher amount on acquiring new assets. In fact, the company has spent 80% more towards purchasing fixed assets in ‘05-06 compared to the previous year.

At the individual level, as many as 31 companies have spent much lower amounts on loan repayments in ‘05-06, while 28 others had no loan repayment expenditure at all. Much of the funds saved on this head seem to have been utilised for purchasing new assets.

Besides Reliance Industries, which has spent 80% more on purchases of assets, Tata Motors, Tata Consultancy Services, Wipro, JSW Steel and Century Textiles, too have spent substantially higher amounts on purchases of fixed assets.

The share of investment, the third component of cash outgo, of course, was the highest in both the years at 72% and 70% in ‘05-06 and ‘04-05, respectively. But then the larger part of this was either a past legacy or purchased by selling investment it held.

Tata Steel, for example, spent Rs 8,314 crore towards purchases of investments in 2005-06, but has earned Rs 7,090 crore by selling investments in the same year. Tata Motors at the other end, earned Rs 1,159 crore by selling investment in ‘05-06, but spent only Rs 236 crore towards purchasing new investment.