Reducing the Cash Pie

India Inc. has been accumulating huge amounts of cash for a while, but it has drawn attention only now because of rising interest rates, which have put the brakes on cash hoarding. Here's a look at 389 BSE 500 companies, excluding banks and financial services companies, which saw an aggregated cash pile of around Rs 2,98,709 crore. That is 6 per cent lower than last fiscal, and the first-ever contraction for over a decade.

But, where is this money exactly flowing? Cash flows in a company through operations, investments and financing activities. In 2014/15, cash flow from operations for the 389 companies grew around 4 per cent compared to 2013/14. However, cash outflows from financing activities were recorded at a higher rate at 83 per cent this fiscal compared to 74 per cent last year.

Here are some more encouraging numbers. After a spike in debt levels between 2008/09 and 2011/12, an element of sanity has now been witnessed - the pace of growth in debt is moderating substantially from the highs of around 40 per cent in 2008/09 to 3.6 per cent in 2014/15. The signal is clear. "That companies are paring debt was visible through cashflow statements. There is more cash from operations, but a negative cash flow from financing activities indicates more debt repayments by the corporates," says Rahul Jain, Assistant Vice-President, AnandRathi Financial Services, adding that this was also an effort to restructure their debt financing, clean their balance sheets and strengthen them.

Aggregate investments by these companies in mutual funds, government securities, equities, subsidiaries and overseas grew around 13 per cent in 2014/15 compared to 19 per cent in 2013/14. Says Madan Sabnavis, Chief Economist, CARE Ratings: "The cash levels have come down due to drawdown for use for both working capital and investment purposes. This is so as conditions in the credit market are tough. Also, with rates being high, dipping into cash reserves is one effective way to lower interest costs. Some have also deleveraged by dipping into the cash reserves."

As we delved deeper, some interesting facts were unearthed. For instance, there has been a steady rise in the number of companies with more cash on their books than debt over the past two-three years. In 2014/15, the number of cash-surplus companies went up to 131, which is the highest in over a decade. "There have been profits made by these companies and they are accumulating the same. There have been benefits for companies due to falling input prices as commodity prices have come down globally," says Sabnavis.

The capital expenditure spending behaviour of India Inc. is also throwing up an interesting trend. The gross fixed capital formation (at a constant price) as a share of gross domestic product (GDP), which is a proxy for investment, showed serious downtrend in growth - declining around 3 percentage points over the last four fiscals and, according to advance estimates, will be 31.6 per cent in 2015/16. However, the government has managed to deliver well with respect to under-implementation of projects compared to private companies.

Says Sabnavis: "Private investment has slowed as there is surplus capacity with utilisation rates being 70 per cent on an average. The government has two advantages for projects: one, it has access to low-cost funds; and, two, it can go ahead irrespective of commercial considerations. For the private sector, projects have often become unviable or still are stuck due to issues related to land purchase or environment."

Dividend distribution also failed to make up to the corporations' priority list this time unlike 2014. The 389 companies witnessed dividend payout growth of just 11 per cent in 2014/15 compared to a robust 26.2 per cent growth in 2013/14. This is, more or less, correlated to the earnings growth of the companies, which deteriorated substantially in 2014/15, slipping into the red as opposed to a double-digit growth in the previous fiscal.

Most public sector companies have been historically cash rich but have seen some reduction in their cash levels in 2014/15. "They have been paying higher dividends as well as using some for investment purposes. This is why cash reserves have come down," says Sabnavis of CARE Ratings. Sectors such as information technology (IT) and pharmaceuticals have also seen growth of over 15 per cent in their cash levels last fiscal. "IT and pharma companies delivered well last year and were consistent performers. On top of it, currency depreciation has also worked well for the sectors," says Jain.

Let's hope for the best as sanity appears to have returned. With corporates focusing on strengthening their balance sheets, the rest will follow.