Dip in working capital per rupee of sales reflects liquidity crunch

Pradip Kumar Dey, FE Research Bureau

Working capital is an item which is required for day-to-day operation of of the company. It is a derived item and represents the excess of current assets over current liabilities.

Of the 245 big companies (sales above Rs 300 crore) selected for this study, nearly 38 per cent were found to have reduced their financial strength, measured in terms of working capital, in 2000-01 over the previous year.

The present study traces the trend of working capital per rupee of sales and profit ratio for 24 industries and 245 public limited companies in 2000-01 and 1999-00.

The industries selected are aluminium (2 units), auto & ancilleries (17), cement & products (8), cotton textiles (12), diversified (20 ), other chemicals (26), electricity (3), electrical goods (18), engineering others (20 ), fertilisers (11 ), food products (6), hotels (2), manmade fibres (6), paper & products (8), pharmaceuticals (16), paints (4), computers(13), iron & steel (12), sugar & breweries (6), telecommunication (2), tobacco (3 ), diamonds (2), tyres & tubes (7), and miscellenous (21).

Data for the 245 companies has been computed from individual balance sheets.

The top 10 companies, according to the profit ratio during 2000-01, were GTL (53.14 per cent), MoserBaer (41.49 per cent), Zee Tele (35.92 per cent), Infosys Techno (32.87 per cent), NIIT (29.90 per cent), Hindalco (29.80 per cent), Pentamedia Graphics (27.80 per cent), MBT (24.93 per cent), DSQ Soft (24.32 per cent) and ITC (22.94 per cent). The highest profit ratio of GTL can be explained from its net profit figures. The net profit of the company increased by 89.1 per cent to Rs 433 crore during 2000-01 from the level of Rs 229 crore during 1999-00. On the other hand, the top 10 firms according to working capital per rupee of sales during 2000-01 were HEI (2.13 ), Zee Tele (1.84), KEC International (1.32), Moser Baer (1.23), DSQ Soft (1.05), Sakthi Sugar (1.05), DCM (1.04), India Cement (0.83) and Aptech(0.78). Only three companies, Zee Telefilms, Moser Baer and DSQ Soft are common to both the lists
Of the 245 firms, 93 witnessed a higher profit ratio in 2000-01 over 1999-00, while the remaining 124 showed a decline in profit ratio. Mangalore Chem was the worst hit (27.75 per cent in 1999-00 to 5.37 per cent in 2000-01). At the other end of the spectrum, ITC Bhadra notched an impressive rise from -8.19 per cent in 1999-00 to 6.53 per cent in 2000-01.

In terms of working capital per rupee of sales, 119 companies recorded a fall, while another 112 showed a higher ratio in 2000-01 over 1999-00 and the remaining 14 showed no change.

Birla VXL experienced a sharp reverse -1.10 in 1999-00 to 0.64 in 2000-01. KEC International’s ratio increased from 0.66 in 1999-00 to 1.32 in 2000-01.

At the aggregate level, the profit ratio of the 245 companies decreased from 6.29 per cent in 1999-00 to 6.26 per cent in 2000-01.
The working capital per rupee of sales for the 245 companies declined from 0.30 in 1999-00 to 0.29 in 2000-01. This reflects that the corporate sector faced severe liquidity crunch, but managed to increase its profit during 2000-01.

In an industry-wise analysis, the diamond industry topped the list in terms of working capital per rupee of sales with 0.65 during 2000-01. However, this was mainly due to the large amount of working capital maintained by Su-Raj Diamonds.

Grabbing second place was computors with 0.54, followed by hotels (0.51), sugar & breweries (0.48), engineering others (0.46), electrical goods (0.42) and aluminium (0.42). On the other hand, food products (0.07), auto & ancilleries (0.16), paper & products (0.18), paints (0.19) and telecommunication (0.22) were the laggards with very low working capital per rupee of sales.

During 1999-00 to 2000-01, a substantial increase in working capital per rupee of sales was witnessed in tobacco (0.25 in 1999-00 to 0.32 in 2000-01), electrical goods (0.32 to 0.42), computers (0.44 to 0.54) and electricity (0.28 to 0.36). On the other hand, sharp declines were seen in hotels (0.61 in 1999-00 to 0.51 in 2000-01), paper & products (0.25 to 0.18), iron & steel (0.32 to 0.23) and aluminium (0.52 to 0.42). Normally, good companies enjoying rapid sales turnover would have relatively higher sales per rupee of working capital. The general trend has been of the working capital position improving for companies which have shown improvement in their profitability and similarly, companies which have witnessed a fall in their profitability, are facing liquidity crunch.

In profit ratio, the software industry topped the list with 24.37 per cent during 2000-01.

However, this was mainly due to the significant amount of net profit recorded by Infosys Techno. The aluminium industry came second with 22.71 per cent, followed by tobacco (19.85 per cent), hotels (18.09 per cent), telecommunication (12.03 per cent) and electricity (11.33 per cent).

The industries to record the lowest profit ratios were tyres & tubes (0.20 per cent), auto & ancilleries (1.37 per cent), diamonds (2.39 per cent), electrical goods (3.03 per cent), engineering (3.12 per cent) and iron & steel (3.46 per cent). Majority gainers were cement (2.57 per cent in 1999-00 to 3.52 per cent in 2000-01), software (17.97 per cent to 24.37 per cent) and iron & steel (0.33 per cent to 3.46 per cent).

Sharp declines were seen in tyres & tubes (3.96 per cent in 1999-00 to 0.20 per cent in 2000-01), engineering (5.25 per cent to 3.12 per cent), auto & ancilleries (5.56 per cent to 1.37 per cent) and electricity (13.33 per cent to 11.33 per cent).

The higher the profit ratio, the greater is the working capital per rupee of sales. Software, which had the highest profit ratio of 24.37 per cent in 2000-01, also had higher working capital per rupee of sales at 0.54. Aluminium industry followed second with 22.71 per cent (0.42 working capital per rupee of sales) and hotels with 18.09 per cent (0.51 working capital per rupee of sales). On the other hand, auto & ancilleries had a lower profit ratio of 1.37 per cent and lower working capital per rupee of sales of 0.16.