Holding back payments

It’s not just acchhe din that continues to evade India Inc, but also cash due to them. Another tell-tale sign that India is firmly in the grip of a slowdown is reflected in the worsening working capital cycle of Indian companies. In FY15, average debtor days for publicly listed companies stood at 42. The last time it was this high was in FY10 after the sub-prime credit crisis.  

Debtors are typically non-income generating capital. The problem with high debtors is that it inflates sales and reported profit and shifts the rot to the balance sheet. In certain sectors during a downturn, companies tend to offer softer credit terms to keep sales high and retain market share. While this works well for companies having access to cheaper credit, for others it eventually leads to stress. The net effect of debtors piling up in the balance sheet is that it ends up dragging down the company’s return ratios.

A cursory look at the financials of manufacturing companies having a market cap of more than Rs.500 crore shows that not only the absolute amount of debtors outstanding (₹651,452 crore) but also the quality of debtors is worsening as debtors accounting for dues over six months (sticky debtors) has gone up from 1.7% of sales to 1.9% of sales. As against sales growth of 2% in FY15, companies have seen an 8% increase in debtors and a 12% increase in sticky debtors. 

Among the affected sectors, power, textiles and paper have seen the highest increase in debtor days. Power tops the list having witnessed a 13-day year-on-year jump or an increase of 33% in its debtors to ₹44,500 crore. Power companies are facing a huge challenge in recovering dues from state electricity boards, which themselves are financially stressed.

In textiles, overall debtor days have gone up by eight days to 65 days in FY15. Alok Industries has seen its debtors jumping by 51% and despite that huge jump, the company’s sales grew only by 12% in FY15. "Demand is very weak and it is difficult to get money from the market. If a retailer is not able to sell the goods, pressure is bound to increase on suppliers particularly who wants to keep their sales numbers high," says Surendra Shetty, CFO, Siyaram Silk Mills.

The situation isn’t any better in metals. Vedanta have seen a 164% increase in debtors older than six months. In steel, Bhushan Steel has seen a 65% increase followed by smaller players like APL Apollo Tubes which has registered a eight-fold jump in sticky debtors.“Steel prices have fallen and realisations have been hit. In that situation you delay payment to your suppliers because your first priority is to pay interest to the banks," says Chandrahas Chaudhary, country head, JC Resources, which provides raw material to the steel sector.

Sticky debtors are a bigger concern in sectors where product price erosion has happened and buyers are negotiating for a discount. Since FY12, global newsprint price has fallen from $677 per tonne to around $500 per tonne currently and local paper companies have seen a 221% increase in its sticky debtors. "Because paper prices have fallen significantly, customers want to renegotiate prices. But in general, we are seeing higher receivables as a result of lower demand," says Pradeep Kumar Sonthalia, CFO, Orient Paper.

Similarly in chemicals, engineering and construction there has been a huge jump in sticky debtors and many companies have piled on debt due to a shortfall in internal accruals. Low demand and overcapacity is pretty much the bane across corporate India and companies are banking on a lower interest rate to resuscitate demand. There is no sign of a solid revival and until that happens India Inc will continue to delay payments to its suppliers.