Cash flows for companies dry up due to lockdown

MUMBAI: Cash flows, the lifeline of companies, are drying up quick. An prolonged lockdown has left companies – micro, small & medium enterprises (MSMEs) specifically – looking at a bleak future. Some companies are struggling to pay salaries to workers, whereas some are taking a look at winding up operations reasonably than proceed with an unprofitable enterprise.
Companies use working capital for their day-to-day bills. When completed merchandise are bought, they get earnings. While the mounted bills – resembling salaries to workers – have remained fixed even throughout the lockdown, there’s been no earnings or money that has come for a non-essential producer or service supplier.

DPK Engineers CMD S Sampathraman mentioned, “Cash flow is to a business what blood is to the human body. When there’s no blood circulation for a few minutes, we would die. My cash flows will run dry in a week.” DPK Engineers, which posted a turnover of round Rs 250 crore in 2017-18, is into diesel mills.

Several MSMEs are dealing with a troublesome time in drawing working capital from banks. “My banker said 10-12 days ago that he would lend 20% extra over and above the existing lending limit to alleviate the Covid-19 lockdown problems. A couple of days ago, he said the extra limit has been slashed to 10%. Eligibility criteria continue to be surplus of assets over liabilities, sufficient stocks and debtors (with margins of 25% and 30%, respectively) to avail the 10% extra credit. These criteria are impractical when there has been zero business in the 40 days of lockdown,” mentioned Sampathraman.

In massive companies, there’s larger debt, however in addition they have extra belongings to pledge/promote and search additional funds. Those with stronger stability sheets have enough money to maintain their operations for an extended interval. Reliance Industries, the nation’s most valued firm, had a debt of Rs 3.36 lakh crore as of March 2020, whereas its money and money equivalents stood at Rs 1.61 lakh crore.

Companies like TCS, which has zero debt and powerful money flows, are higher positioned to tide over the difficult enterprise setting. TCS’s money circulation from operations stood at Rs 32,303 crore in fiscal 2020. Employee prices, the best expense of the corporate, comprised 42% (Rs 65,642 crore) of its income. TCS is the biggest employer of coders within the nation with 4.5 lakh folks. On the opposite hand, Hindustan Unilever’s money place as on March 31, 2020, is Rs 9,770 crore.

Kotak Securities EVP Rusmik Oza mentioned, “The lockdown and uncertainty of when things will get back to normalcy have brought cash flows back into focus. Companies having higher ebitda (earnings before interest, tax, depreciation and amortisation) margins, less/no debt and decent cash in their balance sheets will be able to weather this phase in a better manner. From an operations perspective, companies generating healthy operating cash flows are better placed in these times when revenue is impacted but certain fixed costs still need to be incurred.”

Unlike massive enterprises, a number of MSMEs are in dire straits. “It’s practically a winding-up situation for 60% of them,” mentioned Sampathraman. Solkar Solar Industry CMD Ok E Raghunathan is contemplating shutting operations altogether. “We do not have any cash. Period. I am planning to wind up my operations because I am pushed to the wall. At one point the pilot has to eject. I will no longer be able to run the company profitably,” mentioned Raghunathan. “But I will ensure all my dependents are taken care of,” mentioned Raghunathan, who has been an entrepreneur for over three many years and began Solkar Solar Industries in 1984.

“One major commitment I have is salary, which I do not know how to pay. There’s a lot of pressure on MSMEs to reduce their drawing power (cash from banks). According to my understanding, 70% of MSMEs will not be able to pay salaries this month,” mentioned Raghunathan.

Companies which have higher working capital cycles are much less strained in such occasions. Traditionally, sectors like FMCG, IT, prescription drugs, agrochemicals, two-wheelers and gasoline, which have higher money flows and lesser Capex necessities, will probably be much less impacted within the close to time period. On the opposite hand, sectors which are extremely capital-intensive and have excessive mounted prices will discover it tough to handle this tough section of Covid-19.

“Sectors that could face cash flow problems in the very near term are aviation, smaller NBFCs, capital goods, construction, hotels, infrastructure, metals, real estate and textiles,” mentioned Oza of Kotak Securities. Sampathraman mentioned the federal government ought to spend $500 billion on doles to poor, safety of livelihood of worker and short-maturity infrastructure tasks with huge rural employment alternatives, like registering and selling ‘Geographical Indications’ for free.

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