The report of the top 500 companies (by sales) in India reveals that the working capital situation has worsened due to increase in inventory levels, which has resulted in an increase in cash-conversion cycle to 44 days in FY17.
EY has stated in its annual report that India Inc has the potential to release ₹1.8 lakh crore of cash trapped in its balance sheets.
The report, ‘Working capital management - are you leaving cash on the table?’, of the top 500 companies (by sales) in India reveals that the working capital situation has worsened due to increase in inventory levels, which has resulted in an increase in cash-conversion cycle to 44 days in FY17.
As the cash-conversion cycle has increased and the operating cash flow deteriorated (by 0.7 percentage points in FY17), there was a need to increase working capital funding, which has led to a significant increase in short-term borrowings, the report said.
Further, the 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, according to the report.
The cash-conversion cycle for larger companies (top one-third by revenue) is significantly lower than for smaller companies (bottom one-third by revenue), the report noted.
Larger companies have better negotiating leverage and operating efficiencies, thus driving improved collections and relatively lower inventory levels.
The report said that the transition from the old tax structure to GST initially impacted the working capital cycle of companies. Firms with strong working capital management are expected to see over the short-term disruption better than firms with lesser focus on cash management. GST can prove to be both a challenge and an opportunity to effectively manage working capital.
The report said that 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 per cent in FY17 as compared to a growth of 2.8 per cent in FY16, which has had an impact on both short and long-term financing.
Source: Hindu BusinessLine