Rs 4,20,000 crore locked up in top 400 firms

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Four hundred of India’s largest businesses in the BSE 500 are sitting on excess working capital of a massive Rs 4.2 lakh-crore ($78 billion). This amount is equal to 11 per cent of their aggregate sales.

The Rs 4.2 lakh-crore of trapped working capital money is in the form of inventories, trade receivables and negated to some extent by suppliers trade payables, according to Ernst&Young’s first-ever report on the working capital performance of 400 BSE companies.

Working capital is a source of liquidity that is largely untapped today. It consists of net investment in the operating cycle of the firm and is the difference between the current assets (trade debtors and inventories) and current liabilities (trade creditors).

Ankur Bhandari, a partner for working capital advisory services at E&Y told this newspaper that he was surprised when companies ask them to look for loans at 8-9 per cent interest against the high interest they are currently paying.

He said “they have the money in their backyard and need to manage their operations more efficiently so that they have a lower level of working capital tied-up.”

Sectors that are facing distress like steel, industrials and infra need to focus on collecting their money in time.

He said that Indian companies had grown at a scorching pace of above 20 per cent since 2009, which led to increase in size and complexity of operations. This, he feels, has resulted in inefficiency and lack of focus and the subsequent failure to manage working capital.

“They have to learn to monetise the cash invested in business and if they are unable to do this they will be at a disadvantage in global competitive environment,” he said.

In FY12, the largest companies reported a significant deterioration in the working capital performance. He suggested that firms should focus on reducing the working capital investment.