Sep 14 2010
Conventional wisdom is that it is good to have some cash in hand.....
But what can be said about companies sitting on heaps of idle cash that should be put back in business or otherwise productively used? Are cash-rich listed companies a better bet for investors than other companies? Are they sacrificing growth for conservatism? Does it indicate that a company generating big cash from existing lines of businesses are so bereft of ideas that they do not know what to with the surpluses?
An analysis by Financial Chronicle of the last annual results of listed companies brings out a mixed picture. It reveals that companies with the largest proportions of net cash to total assets were a diverse lot coming from different sectors.
The 10 most cash-rich companies in descending order, were Engineers India (which is in engineering turnkey services), Alstom Projects India (electricals), Castrol India (lubricants), Akzo Nobel India (paints and varnishes), Glaxosmithkline Pharma (medicine), Glaxosmithkline Consumer Healthcare (food & dairy products), NMDC (minerals), Lakshmi Machine Works (textile machinery), Hindustan Unilever (fast moving consumer goods, or FMCG) and Ingersoll Rand (compressors and drilling equipment).
Eight of them had zero debt and the other two very low levels of it. “There could be a variety of reasons why a company is sitting on a lot of cash; an important reason could be that it is waiting for the right acquisition opportunity and so accumulating cash,” said Naresh Makhijani, executive director of tax and regulatory services at KPMG India.
Some of these companies had a significant market share in their respective industries. They were either backed by a strong brand or technological edge, giving them high profitability and hence the ability to generate significant cash flows.
The top 10 companies’ combined net cash position was Rs 22,572 crore, or 92.17 per cent of their aggregate total assets of Rs 24,490 crore. Their net sales during the last financial year were Rs 36,791 crore, not an insignificant amount when seen in the light of the Union government’s income. The government’s estimated revenue receipts were Rs 5,77,294 crore. Thus the 10 companies equalled 6.37 per cent of the government’s revenue.
Their aggregate net profit was Rs 7,652 crore, whereas the government had a negative profit (revenue deficit) of Rs 3,29,061 crore.
(There are listed companies that are steeped in high net debt too and tomorrow’s issue of FC will analyse them.)
Two of the 10 most cash-rich companies belonged to the government -- Engineers India and NMDC. Together these two had net cash of Rs 14,649 crore, accounting for 65 per cent of net cash of all the 10 companies put together. Their net assets totalled Rs 15,247 crore, or 63 per cent of the 10 companies’ aggregate.
Engineers India and NMDC, however, did not fare so well in terms of other indicators: Their combined net sales and net profit accounting for 22.43 per cent and 50.85 per cent, respectively, of the total of the 10 companies.
What defines a cash-rich company? Shanto Ghosh, executive director and principal economist at Deloitte, said, “Generally, if the percentage of debt to total assets is as high as say 10 per cent, it is considered to be a cash-rich company. But where the working capital requirement is very high and the runaround time is also high, this percentage will have to be really high, 25 per cent or more. For FMCG companies, for instance, many things have to be purchased from many vendors with cash and, therefore, their working capital requirement is very high.”
Dipen Shah, senior vice-president of private client group research at Kotak Securities, said, “If the net cash to total assets is 60-70 per cent or more it means the company is generating significant cash. It is a positive for investors in the company.”
Most of the sectors in which the top 10 companies operate did well in their last financial year. For instance, Glaxosmithkline Consumer Healthcare and Castrol India. Though not strictly FMCG in the conventional sense, Castrol is driven by consumer demand for branded lubricants, particularly in rural and semi-urban markets. So they can be called quasi-FMCG companies. They, along with Hindustan Unilever, represented the FMCG sector. Most FMCG companies saw a good pick-up in sales and reduction in inventories.
Alstom Projects India, which executes and services power plants, has been the beneficiary of heightened infrastructure spending in the past three years. As per its consolidated financials, the company’s net sales in 2008-09 and 2009-10 averaged Rs 2,165 crore, up 56.56 per cent from the preceding two years’ average of Rs 1,383 crore.
According to an analyst at Religare Capital Markets, who did not want to be named as he was not authorised to comment, said, “Alstom is 50 per cent into consulting and 50 per cent into contracting. Consulting is a business that throws up a lot of cash and needs almost zero working capital. The contracting business does need some working capital but the margins are very high.”
FC contacted Engineers India, Alstom, Castrol India, Akzo Nobel India, Glaxosmithkline Pharma and Glaxosmithkline Consumer for comments but got no response.
According to analysts, while high net cash to total assets is a sign of strong financial health of a company, it could also mean it does not have growth opportunities or is not adequately deploying surplus cash in its existing business.
This can moderate profit growth in the future. “Companies in specific industries, for instance, can deliver a growth of 10-15 per cent only because the industry is growing at that pace. They may not invest significant cash,” said Shah.
Shah is quick to point out, however, that most large IT companies have a lot of cash in their balance sheets but this does not mean there are no avenues for further growth. “Large Indian IT companies do not give out all its cash as dividend. They invest significant sums every year back in expanding their business. Despite this, they are left with free cash flows,” he said.
In our analysis, Infosys Technologies was 17th among companies with high net cash to total assets proportions. Its ratio was 52.54 per cent. According to its consolidated financials for 2009-10, it had cash and cash equivalents of Rs 12,111 crore, a zero debt liability and total assets of Rs 23,049 crore.
In some cases of high net cash, the companies probably did not have fresh acquisition opportunities and could be building up cash for future acquisitions.
High net cash is useful to companies operating in sectors seeing tough times. Lakshmi Machine Works, for instance, was the eight largest company in the analysis having a net cash to total assets of 79.56 per cent. It had zero debt, a cash position of Rs 732 crore and total assets of Rs 920 crore. Its net sales had fallen in the last two financial years, 2008-09 and 2009-10. This forced it to cut dividend payout to 150 per cent each from 450 per cent in 2007-08 and 400 per cent in 2006-07. But it managed to keep its net cash position steady.
By and large, companies with high net cash to total asset ratios offer safe bets for investors. Investors need not cash out of such companies even if growth moderates for a few years. The market will factor in the high net cash position and there may not be any loss to the investor in such stocks.
(With inputs from Ritwik Mukherjee in Kolkata)
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