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Tighter inventory, but loose credit

Tighter inventory, but loose credit
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First Published: Mon, Nov 21 2011. 10 24 PM IST

Updated: Mon, Nov 21 2011. 10 24 PM IST
It is well known by now that Indian companies have had their worst earnings in recent quarters in the three months ended September.
As the economy slows amid high inflation, these firms are desperately trying to improve efficiency and nail the main culprits—higher interest costs and raw material prices. The results have been mixed.
On the face of it, the firms have enough liquidity to cover their near-term liabilities.
The current ratio, which measures a firm’s wherewithal to fund its short-term obligations, stood at 2.36 at the end of September for 353 non-financial services firms in the BSE-500 index. This metric was 2.22 a year ago.
However, all is not exactly well. At a time when servicing debt is becoming increasingly difficult, net working capital has ballooned.
At the end of the first half of this fiscal, net working capital for this sample increased 30.7% from a year ago.
That outpaces the 25.2% increase in net sales and shows that the companies are using more funds to generate the same amount of sales.
Still, the positive is that these companies are getting increasingly aggressive on pushing out products once manufactured and decreasing the carrying cost. Inventory is being turned over much faster. For this sample of firms, the inventory turnover ratio has declined to 53.2 days from 55.3 days a year ago.
However, the push for sales is coming at a cost. As expenditure increases at a rapid rate, operating profits are plummeting. Thus, despite an increase in sales, the firms are losing pricing power. This also means that they are willing to extend more credit to their customers.
As a result, the average credit this sample set of firms extends to its customers has increased to 41.1 days by the end of September from 38.3 days a year ago. With interest rates still ruling high and now the added scare of a slowdown in consumption, things could get worse.
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First Published: Mon, Nov 21 2011. 10 24 PM IST