IndianOil, Tata Motors, Sterlite most successful in lowering working capital in '08-09
New Delhi   19-Feb-2010
IndianOil, Tata Motors, Sterlite Industries and UB Holdings were some of the most successful Indian companies to significantly reduce the working capital in the recessionary year of 2008-09, according to a study by consultancy firm Booz & Company. Booz and Company's Annual Working Capital Study: II for India evaluated the working capital position of 158 leading Indian companies across 18 sectors with a combined profit of Rs 130,000 crore (FY 08-09) and analysed whether India Inc was able to lever-age recession to unlock cash for itself. The 2008-09 is key as the period saw global economies led by US and European economies slipping to a downturn in the aftermath of Lehman crisis, forcing governments to come out with multi-trillion dollar stimulus packages. At the end of FY09, the 158 companies studied had about Rs 450,000 crore blocked in inventory and receivables and about Rs 160,000 crore in net working capital. While net working capital of the companies studied grew faster than sales from 2005 to 2008, during 2008-09 companies reduced their working capital by 2 per cent even as sales increased by 20 per cent. "The last two quarters of 2008-09 were defined by one of the widest and deepest downturns to hit the Indian economy that severely impacted profitability as well as operating cash flows. With more than Rs 200,000 crore locked up in working capital in top companies, working capital reduction was one of the most attractive avenues for generating cash to survive the downturn and many companies rightly responded with a focused campaign to cut costs and conserve cash," said Mr. Piyush Doshi, principal of Booz & Co. Measured in terms of absolute cash release, the biggest reduction in working capital was achieved by IndianOil followed by Tata Motors, Sterlite and UB Holdings. Oil, steel and auto companies due to their sheer size dominate the list. At a sectoral level, most sectors saw a reduction in net working capital except power, cement, construction and retail, which saw marginal increase. The success was not evenly distributed as 60 per cent of the companies studied saw a reduction in net working capital days while 40 per cent of the companies saw an increase. Many companies achieved this improvement by better management of inventory and receivables with some increase in payables. "The top-down directive in the Tata Group to conserve cash appears to have paid dividends as most of the large Tata Group companies, including Tata Motors, Tata Chemicals, Tata Power and Tata Steel managed to reduce their working capital during 2008-09", Mr. Doshi said. Commenting on future trends, he said, "We have observed that while several companies reduced their working capital on all three dimensions (inventory, receivables and payables), many companies simply stretched payables to control working capital. Hence, we believe the gains for the companies that went for holistic reduction will sustain, the companies that only relied on payables are likely see their gains erode in 2009-10 as bargaining power of suppliers returns." As significant gaps in working capital performance between leaders and laggards continues, this indicates that some companies make it a strategic priority while others don't. In many cases, the best performers are also industry leaders but not always so. This shows that even companies that have limited market power can achieve superior performance on working capital through adoption of best practices, Mr. Doshi said.