WORKING CAPITAL CRUNCH FOR CAPITAL GOODS COMPANIES

DIFFICULT TIMES

A study conducted by credit rating agency CRISIL (subsidiary of Standard and Poor's) shows that the working capital requirement for the capital goods sector in India have surged at a 5 year high. The pressure on this sector is primarily due to the deferment of large capital investment plans since 2011-12 (refers to financial year, April 1 to March 31) by end user industries such as power utilities. The resultant build-up in inventory and delay in release of payments by customers has led to tight liquidity conditions within the sector. The reasons for deferment in projects include demand slowdown, increase in project costs and interest rates, and lower cash flows.

WORKING CAPITAL NEEDS SURGE

Working capital requirements have increased substantially; the gross current asset (GCA) days of a sample of 50 listed mid-sized players have increased to 370 as on March 31, 2012, from 280 as on March 31, 2009, the highest in the past five years. GCA days refer to gross working capital expressed as number of days of sales and the sample of 50 companies accounts for a-third of the revenues of all capital good entities covered by CRISIL.

HIGH COST DEBT PILING ON

A large portion of the incremental working capital needs has been funded either through delayed payments to suppliers or through high-cost short-term debt. Prevailing high interest rates for short term borrowings have led to a steep drop in  the interest coverage ratio (profit before depreciation, interest, and tax/interest, and finance charges) of companies covered by CRISIL. 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 thereby indicating that the cash from operations is inadequate for servicing debt payments.


Source: CRISIL