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Slowdown forces top companies to save; cash reserves up 12% in FY14

Jun 09 2014, 02:04 IST
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SummaryIndia’s largest companies by market value saw a significant rise in cash and equivalents on their books

India’s largest companies by market value saw a significant rise in cash and equivalents on their books, along with the cash profit they made in the last financial year. Analysts read this as a sign of the downturn in the economy having bottomed out and the cusp of a new investment cycle that companies are likely to start shortly.

The total cash profit of the 30 companies that form a part of BSE’s benchmark index, Sensex, rose 14.6% in FY14 over the year earlier at R2.7 lakh crore, a significant improvement over the marginal 1% rise in FY13.

The universe of companies whose numbers have been analysed excludes banking and financial services firms and Sesa Sterlite.

The cash profit growth registered by these companies was the best in three years. The aggregate cash and cash equivalents on the books of these companies also registered a healthy 12.23% growth in FY14 to R3.76 lakh crore, compared to 4.8% growth a year earlier.

Tax

One of the main reasons for cash and cash equivalents growing on companies’ balance sheets is their predisposition to retain as much cash as possible in their reserves since investing in capital creation and chasing revenue growth did not make sense in a slowing economy.

“When a downturn is near its bottom, the cash position of companies generally tends to improve as they stop chasing revenue growth and the working capital cycle improves,” said Saurabh Mukherjea, head of equities research at Ambit Capital.

“When the economy is doing well, companies are comfortable with selling to customers on credit and in turn delay payments to suppliers. But in a downturn, companies keep a tight control on costs and receivables, which adds to cash profits.”

In addition to this, the sharp depreciation of the rupee versus the dollar helped companies engaged in exports like information technology firms, automobile and pharmaceutical makers rake in more cash during the fiscal.

Not surprisingly, some of the major gainers (in percentage terms) as far as cash and equivalents is concerned were companies like Sun Pharmaceutical Industries Ltd (up 184.16% at Rs 9,588.6 crore), Tata Consultancy Services Ltd (103.75%at Rs15,649.54 crore) and Maruti Suzuki India Ltd (up 68.21% at Rs 9,654.45 crore).

Companies like Sun Pharma, for instance, benefitted from significantly higher revenues, especially dollar revenues from the US market. TCS’ international business also did well on the back of a

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