Blocking Dries Cos Cash Flows

Namrata Singh and Reeba Zachariah | TNN

Mumbai: Businesses are running out fast. A prolonged blockade has left companies, particularly micro, small and medium-sized companies (), looking towards a bleak future. Some companies are struggling to pay salaries to employees, while others are looking to liquidate operations rather than continue with an unprofitable company.

Companies use working capital for their daily expenses. When finished products are sold, they earn an income. While fixed expenses, such as employee wages, have remained constant even during closing, there has been no revenue or cash for a nonessential manufacturer or service provider.

DPK CMD S Sampathraman engineers said: “Cash flow is to a business what blood is to the human body. When there is no blood circulation for a few minutes, we die. My cash flows will run out in a week. DPK engineers, who recorded a turnover of around Rs 250 million in 2017-18, are dedicated to diesel generators.

Several MSMEs are facing a difficult time in obtaining working capital from banks. “My banker said 10-12 days ago that he would lend an additional 20% beyond the existing loan limit to alleviate Covid-19's blocking problems. A couple of days ago, he said the additional limit had been reduced to 10%. Eligibility criteria continue to be surplus assets over liabilities, sufficient shares and debtors (with margins of 25% and 30%, respectively) to take advantage of the 10% additional credit. These criteria are not practical when there has been no business in the 40 days of closing, ”said Sampathraman.

In large companies, there is more debt, but they also have more assets to commit/sell and seek additional funds. Those with stronger balance sheets have enough cash to maintain their operations for a longer period. The industries, the most valued company in the country, had a debt of Rs 3.36 lakh crore as of March 2020, while their cash and cash equivalents amounted to Rs 1.61 lakh crore.

Companies like TCS, which has zero debt and strong cash flows, are better able to overcome the challenging business environment. TCS cash flow from operations was Rs 32,303 crore in FY2020. Employee costs, the company's highest expense, accounted for 42% (Rs 65,642 crore) of its revenue . It is the largest coder employer in the country with 4.5 lakh people. On the other hand, Hindustan Unilever's cash position as of March 31, 2020 is Rs 9.77 billion.

Kotak Securities Executive Vice President Rusmik Oza said: “The blockade and uncertainty about when things will return to normal have refocused cash flows. Firms with higher ebitda margins (earnings before interest, taxes, depreciation and amortization), less/no debt and decent cash on their balance sheets will be able to overcome this phase in a better way. From an operations perspective, companies that generate healthy operating cash flows are better positioned right now when revenues are affected, but certain fixed costs still need to be incurred. ”

Unlike large companies, several MSMEs are in dire straits. It is practically a liquidation situation for 60% of them, Sampathraman said. Solkar Solar Industry CMD K E Raghunathan is considering closing operations entirely. We don't have cash. Period. I am planning to finish my operations because they push me to the wall. In a moment the pilot has to expel. I will no longer be able to run the company profitably, ”said Raghunathan. But I will make sure that all my dependents are cared for, said Raghunathan, who has been an entrepreneur for more than three decades and started Solkar Solar Industries in 1984.

“An important commitment I have is the salary, which I don't know how to pay. There is a lot of pressure on MSMEs to reduce their extraction power (cash from banks). As I understand it, 70% of MSMEs will not be able to pay wages this month, ”said Raghunathan.

Firms with better working capital cycles are less tense at those times. Traditionally, sectors like FMCG, IT, pharmaceuticals, agrochemicals, two-wheelers and gas, which have better cash flows and lower Capex requirements, will be less affected in the short term. On the other hand, sectors that require a lot of capital and high fixed costs will have difficulties managing this difficult phase of Covid-19.

The sectors that could face cash flow problems in the short term are aviation, smaller NBFCs, capital goods, construction, hotels, infrastructure, metals, real estate and textiles, said Oza of Kotak Securities. Sampathraman said the government should spend $ 500 billion in bonds to poor Short-term infrastructure, protection of employees' livelihoods, and infrastructure projects with huge rural employment opportunities, such as registering and promoting Geographical Indications for free.