India Inc's daily expense kitty shrinks drastically: Credit Suisse

MUMBAI: Funds used by India’s top listed companies for day-to-day requirements have reduced significantly in the past few years in proportion to their assets, according to a recent analysis of BSE-500 companies by Swiss broker Credit Suisse. According to the report, working capital -- money used by companies for day-to-day business requirements – as a proportion of total assets has declined since 1990s.

While this could mean better efficiency, the trend is worrying as decline in working capital tends to deteriorate sales growth, Credit Suisse analysts led by Sanjay Mookim said. “While aggregate working capital requirements have been flat since FY05, underlying trends have steadily worsened... the latest H1FY12 accounts do not hint at any reversal yet,” the analysts said.

Total working capital, except cash, fell from 17% of total assets in FY97 to 5% by FY05. However, it is the declining cash-conversion cycle – or the time taken by a company to convert money into inputs into cash flow -- that signifies the impact of decreasing working capital on businesses, the analysts said. While the conversion cycle had bottomed at about 57 days in FY05, it increased to 75 in FY11, indicating slowdown in business momentum, they said.

“[The deterioration] indicates a steady structural slowdown in business momentum which is not evident at first, but the results of which show up in profit and loss accounts over time,” the report said. Sectors that showed deteriorating net working capital to total assets since FY05 include cement, staples, healthcare, and utilities. However, improvement was seen in autos, consumer, media and IT services sectors.

However, a few that have better metrics than their sectors are Hero Motocorp, Colgate, ITC, HUL, Tata Coffee and Shree Cement, which is the only exception in the cement sector stocks. Companies that have fared worse than their sector in the analysis include Godrej Consumer, Proctor & Gamble Hygeine, Voltas, BEML, Wipro and TVS Motors, which is the only exception in the auto sector.