More efficient in working capital usage

Written by Pradip Kumar Dey | Updated: Jan 16 2012, 07:02am hrs
The public sector companies saw an improvement in their capital use efficiency last year. An FE study shows working capital turnover ratio of 53 PSUs (excluding banks and NBFCs) see-sawed from 5.85% during 08-09 to 4.97% during 09-10 and 5.21% during 10-11.

Their working capital, however, saw a steady increase from R1.65 lakh crore during 08-09 to R1.84 lakh crore during 09-10 (11.4% growth) and R2.13 lakh crore during 10-11 (16% growth).

The working capital turnover ratio shows how effectively a PSU is using its working capital to generate sales. A PSU uses working capital to fund operations and buy raw materials. These are ultimately translated into sales revenue. The working capital turnover ratio explains the number of times the working capital is turned over in the course of a year. The higher the ratio, the better it is because it means the company is generating more sales by using less money. The ratio is arrived at by dividing the cost of sales with net working capital (current asset-current liabilities).

The aggregate net sales of the PSUs decreased by 5.3% to R9.13 lakh crore during 09-10 from the level of R9.65 lakh crore a year earlier and increased thereafter by 21.5% to R11.10 lakh crore last year.

The current assets of these PSUs increased by 15.3% to R4.57 lakh crore during 09-10 from R3.96 lakh crore during 08-09 and further by 13.4% to R5.18 lakh crore during 10-11. But current liabilities also steadily increased, by 18.1% to R2.73 lakh crore during 09-10 and by 11.7% to R3.05 lakh crore during 10-11.

A steady increase in the working capital turnover ratio was seen for 12 PSUs, including Petronet LNG, MMTC, GAIL(I), STC, Hindustan Organic Chemicals, GMDC and Engineers India.

A steady decrease in the working capital turnover ratio was noticed in 14 PSUs. They include IOCL,HPCL, Concor, BEL, Dredging Corpn., and SJVN.

The working capital turnover ratio of IOCL steadily decreased from 33.17% during 08-09 to 18.40% during 09-10 and 13.79% during 10-11. The working capital of the company increased from R9,255 crore during 08-09 to R14,637 crore during 09-10 (58% growth) and R24,007 crore during 10-11 (64% growth).

Out of 53 PSUs, only 14 had a working capital turnover ratio below 1. Prominent among them are Coal India, HMT, NMDC, MOIL, MTNL and Punjab Communications.