India Inc's cash generation far robust than US, UK

MUMBAI: The high growth in profits between financial years 2004 and 2008 was not accompanied by matching operating cash-flow growth for Indian firms. The explanation lies not so much in the increase in working capital requirements during this period, as in the sharp increase in the share of non-cash and non-operating profit items, say analysts.

However, the silver lining is that the scale of such practices in India is not worse than what takes place in the Western economies. In fact, India Inc���s cash generation appears remarkably robust and far superior to that of the US or the UK.

According to UK based investment bank Noble���s India Research, Indian corporate recorded rapid profit growth during financial years 2004-2008, that is, compounded annual growth rate (CAGR) of 28%. But this high growth in profit was not accompanied by corresponding operating cashflows (CAGR of 15%), leaving a gaping hole between profits and cashflows.

���Our analysis of 2,637 non-financial companies shows that this gap is explained only in small part by the increase in working capital requirements. For the most part, cashless profit growth is driven by the remarkable rise of non-cash, non-operating sources of profit,��� says Noble economist Dipankar Mitra.

Further analysis points to a few items, such as depreciation, interest payable, interest income, and ���other expenses��� acting as major stabilizers of profit growth, counterbalancing any increase in working capital during this period. Earlier notes by Noble highlighted how items such as depreciation and ���other expenses��� can be used to fudge profits.

But it says that the good news is that India Inc���s operating cashflows were resilient even in the tough years between financial years 2001-2003. In fact, if you compare two periods ��� FY01-03 (considered to be lean years for India) and FY04-08 (the ���India story��� years) ��� CFO CAGR is actually higher in FY01-03 ��� 23% vs 12% respectively as working capital requirements were low in FY01-03. Hence whilst profits are now set for a correction, our bet is that operating cashflows will once again hold up very well.

A comparison with the US and UK highlights India���s far superior position from a free cashflow perspective at every point in the recent economic cycle. The resilience of India Inc���s free cashflows underscores the country���s attractiveness as an investment destination.