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MUMBAI: Free cash flows of Indian companies have shown cyclicality but remained positive for most sectors, leading to reduction in leverage, as per data analysis of 10 years of cash flows and returns for 105 stocks by Centrum Broking Limited.

According to the brokerage firm, FMCG, consumer electricals, automobiles and pharmaceuticals lead the pack in terms of free cash flow (FCF) generation, followed by cement, metals, refining, and gas utility companies.

For metals, FCFs have been rather cyclical but have improved, leading to deleveraging in the sector. Upstream oil and gas and mining firms have seen weak FCFs, and consequently leverage remains elevated. Infra asset owners in ports and highways have also seen increased investments in asset creation, though leverage ratios and liquidity profile have been comfortable, it said.

Working capital levels and operating cash flows have stayed strong or improved for most sectors. Among other drivers, extracting better credit terms from suppliers has helped. This is especially visible in automobiles, cement, FMCG, consumer electricals and in select pharma stocks, centrum said.

“The most prominent improvement is in oil and gas, led by deregulation of fuel prices; in pharmaceuticals, led by a greater domestic focus; and in metals, led by improved capacity utilization and higher product prices," it said.

Construction, too, has seen an improvement in operating cash flows. Operating cash flows for automobiles and cement and building products have been steady, while FMCG and consumer electricals have retained the top slot due to inherent strengths in their business models. Mining continues to witness elevated working capital levels and weak cash generation. There, however, are outliers to these general trends.

Meanwhile, the data analysis showed that capital expenditure has been on a recovery path since FY18 after plunging over FY14-17.

“For our sample set comprising of 12 traditionally capex-intensive sectors, capital expenditure plummeted 17% from 3 trillion in FY14 to 2.5 trillion in FY16. The decline in capex levels was prevalent across capex-intensive sectors like cement, metals and mining, utilities, and oil & gas," it added.

Starting FY17, however, there has been a visible uptick in capex in the cement and metals and mining sectors, while capex has remained muted in automobiles. The auto components sector is seeing a surge in capex, led by tyre manufacturers.

Chemicals and telecom have seen a consistent rise in capital expenditure since FY14. Acquisition intensity in the pharma sector is coming down, though the it continues to invest in research and development. By FY20, total capital expenditure of the same sample of companies had recovered to 3.6 trillion.

The brokerage firms also said that Indian corporates are curtailing overseas ambitions after huge losses which highlights that they are not ready to become multi-national companies yet. “The experience of Indian corporates with overseas acquisitions has been far from remunerative and this highlights that they were ill- prepared to operate in complex or unfamiliar regulatory and market environments," it added.

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