L&T stretches out payment cycle to manage cash flows

L&T is not alone in facing these problems and other firms are also seeing a delay in payments, which is then spilling over to their own vendors

Mumbai: Larsen and Toubro Ltd (L&T), a corporate proxy for the broader economy, has stretched out the time it takes in making payments to vendors, as the company tries to find ways to deal with the delay in payments from its own customers.

Companies, both private and government, implementing large projects have been delaying payments to firms such as L&T, which, in turn, has started to delay payments to their vendors. The result is a cash flow mismatch and also an increase in the size of working capital loans that companies have to take to tide over this mismatch. While larger firms such as L&T have the ability to withstand this stress, smaller vendors are finding it difficult.

L&T acknowledges that payments are taking longer than before.

The company is trying to match cash flows, which means that if vendors were earlier getting paid in 40-45 days, they are now getting paid in 90 days, said R. Shankar Raman, chief financial officer and whole-time director at the company.

“We also have to try to match our cash flows to our cash outgo, but it is not possible on all projects as there are limitations in delaying payment to a vendor. If the vendor has done its job, beyond a point we cannot hold back the payment. But yes, we are trying to match cash flows to some extent," he said.

At least two vendors that Mint spoke to confirmed these delays.

A Mumbai-based vendor who deals with the company’s construction division said he was considering legal action because of delays in payment.

“Although the cycles were getting delayed for the last two years, the situation is only worsening with the firm now delaying even the bill certification process to almost 30 days," said the vendor whose business has an annual revenue of 80-85 crore. He declined to be identified.

After a job is done, the vendors issue a bill to the firm and it has to be certified before payments are released. This is called the bill certification process.

A second vendor, who also works for the construction division of L&T, agreed that payment delays are getting worse and added that his business is no longer viable. He has an annual billing of 12 crore from L&T. He also declined to be identified.

At an aggregate level, the days taken by L&T to pay vendors (called payable days) increased to 127 days in 2014-15 from 121 days in 2013-14, said a 31 May report by brokerage house Religare Institutional Research.

The amount that L&T owes to its vendors (payables) jumped 15% to 18,844 crore as on 31 March 2015, according to the company’s annual report. However, the amount that L&T was still to receive from its own customers (receivables) also jumped 14% to 30,089 crore, shows the annual report.

Given the delay in payments from end-clients, Shankar Raman says the company has little choice.

“We are facing an acute payment shortage from across sectors, which has increased its debtor days, or days of receipt of payment, from its customers to 100 days from 70 days about six-eight quarters ago", he said. “This is partly reflecting on the company’s own payment cycle to some of its vendors, which has stretched from around 45 days to 90 days", he added.

This, in turn, has increased the working capital requirement of L&T to 25% of revenue from 18% of revenue around four-six quarters ago, according to Shankar Raman.

“L&T is facing heat from both the government and private sector. Its working capital days has gone up to 89 days from 72 days in the last six months due to a jump in the number of days of receivables, so sooner or later it has to reflect on its vendors," said an analyst with a domestic brokerage who asked not to be identified.

He said that if the company were to bring down the number of days in which it makes payments to its vendors, its cash flows could turn negative.

L&T is not alone in facing these problems and other companies are also seeing a delay in payments, which is then spilling over to their own vendors.

“Although we have tried to protect our vendors...the amount of receivables, especially from the private sector, is an issue of concern," said M.S. Unnikrishnan, managing director, Thermax Ltd.

The time taken to get payments (receivable days) has increased by 12-15 days in the last one year, he added.

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