Mumbai: Indian firms improved their money management skills during the downturn to pare working capital needs, but their focus has returned to growth as the economy slowly walks out of the woods, says a study by consultancy Booz and Co.
The change in attitude from cutting costs to growth is also underlined by the central bank’s quarterly macroeconomic report released on Thursday, which shows an increasing demand for working capital.
Working capital is the money required by firms to manage daily operations. A lower working capital signifies efficiency, reduces debt and contributes to profit margins.
Booz studied 158 firms from sectors such as automobiles, telecom and steel, and found that they had reduced their net working capital by seven days to 30 days. They collectively released about Rs40,000 crore in cash—or a quarter of the Rs1.6 trillion in net working capital that they employed.
Automotive and fertilizer companies posted the maximum cuts in working capital, said the Booz report. Uttam Galva Steels Ltd, Sun Pharmaceutical Industries Ltd and Mahindra and Mahindra Ltd were among the firms that achieved the highest reductions, it said.
“Working capital has to be managed smoothly,” said Adesh Gupta, chief financial officer of yarn maker Grasim Industries Ltd. “That was the biggest learning from the slowdown.”
But with demand rising and the economy getting back on track, albeit slowly, companies are restocking their inventories and focusing once again on growth.
“Around May-June, companies switched from the mindset of cash conservation to focus back on growth, but most are retaining the lessons learnt last year and not going overboard,” said Piyush Doshi, principal at Booz and author of the report. “It’s like (going) back to the days of early 2008.”
The Reserve Bank of India has revised upwards its outlook for economic growth to 6.9% from 6%.
“Better expectations about order books, capacity utilization and production...are indicative of both improved demand conditions as well as perceptions of further recovery in private demand in the near term,” the central bank said in its report.
The working capital requirement is thus expected to grow during the last quarter of 2009-10. This also suggests that demand for short-term funds from the private sector may rise in coming months, it added.
A lack of credit was a key reason why firms were forced to reduce working capital requirements during the slowdown.
“During the credit crunch, nobody wanted to lend and working capital cycles shrunk,” said M.V.S Seshagiri Rao, chief financial officer of JSW Steel Ltd. “But with banks (now) eager to lend, the working capital cycle will increase.”
Rao also attributes the fall in working capital to declining prices of raw materials and commodities in the wake of a global demand slump.
“Companies have become more efficient,” said Doshi. But “not all of these working capital reductions are desirable”, he added, referring to companies taking more time to pay their dues to suppliers.