BackWorking capital needs jump for construction capital goods firms
Deferment of large capital investment by end-users sparks concerns, says report
Premium(Reuters)
Mumbai: Working capital requirement of companies producing construction capital goods has touched a five-year high amid concerns over their ability to service loans.
Capital goods companies face working capital concerns, largely due to “deferment of large capital investment plans since 2011-12 by several end-users", according to a report by rating agency Crisil issued on Wednesday.
“The resultant build-up in inventory and delay in release of payments by customers has led to tight liquidity," said the report, based on a study of 50 capital goods firms that account for a third of the revenues of all such companies that Crisil rates.
Customers deferring projects resulted in a 15% decline in new orders for capital goods firms in the year ended March compared with the preceding fiscal year, Nagarajan Narasimhan, senior director, Crisil Ratings, said in the report.
The working capital requirement of the capital goods companies studied has increased to 370 gross current asset (GCA) days as on 31 March, the highest in the past five years. GCA days refers to gross working capital expressed as number of days of sales. At the end of fiscal 2008, companies in this sector needed a working capital of 255 GCA days.
Engineering firm Larsen and Toubro Ltd told analysts after announcing its June quarter results that its net working capital had increased to 15.3% of sales for the quarter compared with 11.9% in the preceding three months. The company cited tight liquidity in the supply chain as the key reason for this, according to an analyst with a domestic brokerage who attended the 23 July conference call. He spoke on condition that neither he nor his firm be named.
These companies are in turn delaying payments to suppliers or taking short-term, high-cost loans to meet working capital requirements, affecting their debt servicing capability.
“The interest cover (profit before depreciation, interest, and tax) of the companies surveyed declined to 2.8 times in 2011-12 from 4.1 times in the previous year. The ratio of cash flows from operations to total debt also declined sharply, to a negative 0.30 times from 0.07 times during the same period, indicating that cash from operations is inadequate for servicing debt," the Crisil report said.
A majority of the companies’ working capital was stuck with debtors (in the form of receivables) and inventories, said Nirav Vasa, a Mumbai-based analyst tracking the capital goods sector for SBICAP Securities Ltd.
Even within the receivables, a “major component is retention money, which would be released by the customer only once the entire project is commissioned", said Vasa. This was reflecting in the “higher debt levels for working capital requirements".
“Inventories for equipment manufacturing companies are also rising as clients are delaying equipment off-take," said Vasa, pointing to lower cash balances in the fiscal 2012 balance sheets of engineering, procurement and construction vendors and equipment suppliers.
“There was excess capex build-up when the economy was good and now due to low demand, this capex build-up has become a liability for many companies as projects are drying up and the companies are not realizing their receivables," said R.K. Bakshi, executive director, Bank of Baroda. “The large companies are still doing okay but some stress is visible in downstream companies that used to supply components for large projects."
If payments to the capital goods companies are delayed by their debtors by more than six months, banks shy away from lending to them, according to Narasimhan of Crisil Ratings.
Not only is delayed payments from customers hurting capital goods makers, new orders drying up is taking a toll on their liquidity as well.
“Typically, customers placing new orders pay some advance money, which is also not coming in at present," Narasimhan said over phone. “Companies have to look at managing working capital more effectively and focus on clearing the existing inventory even if it is at a marginal discount, rather than bidding aggressively for new projects."
However, not all capital goods companies are affected by the economic slowdown, according to Ramesh Chandak, president of the Indian Electrical and Electronics Manufacturers Association, a lobby group.
Chandak, who is also managing director and chief executive of KEC International Ltd, a RPG Group company that makes power transmission equipment, said companies such as his that supply equipment only 18 months after a power generation project starts weren’t impacted much, since such orders are placed much later, when the project is nearing completion.
aveek.d@livemint.com
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