The government’s move to demonetise high-denomination currency notes might affect the wholesale supply chain, leading to an increase in the receivables of consumer focused companies, according to analysts.
A Bank of America Merrill Lynch (BofAML) report said that the move will lead to disruptions in the wholesale channel, which accounts for almost 40% of the market. It added that it might lead to an increase in their receivables, or goods and services sold in credit, as companies will be forced to extend incremental credit to dealers and wholesalers.
“Consumer firms typically provide tight credit terms (<7 days) to the distributors, who in turn provide credit to the wholesalers/ outlets on their own accounts. Due to overall tightening of the cash-liquidity in the supply chain, consumer firms may be forced to offer easier credit terms to the distributors in the near term. As a result we expect an increase in their receivables in the December quarter,” it noted.
A detailed FE analysis of consumer-focused BSE constituents reveal that receivables, as a share of companies’ sales, range from as low as 1-2% to, at times, more than 100%. Very high receivables disrupt the working capital management of a firm and often lead to it taking up more debt, which in turn reduces its profitability.
Bank of America Merrill Lynch, however, expects a rise in receivables to be a temporary phenomenon and not last for more than three months. “While we see downside risk to our FY17 EPS estimates, we maintain our positive view led by 7th Pay Commission-linked wage increases, normal monsoon and implementation of the goods & services tax (GST) regime,” they noted.