 "Cash flow of high-debt firms turns positive after 10 years")
In the last financial year, the total cash flow from operations for the country's top 560 listed, indebted firms exceeded their capital expenditure and investment for the first time since 2004-05. A company has a positive free cash flow when its operations generate more cash than what is used in financing capital expenditure and investment.
This was largely because of a sharp cut in capex and investments rather than any material improvement in cash flow generation from operations. Cash outgo on capex and investments declined 19 per cent to Rs 4.15 lakh crore last financial year, while operations generated cash flow worth Rs 4.7 lakh crore in 2014-15, down 1.5 per cent, year-on-year.
The immediate impact was a sharp decline in incremental borrowing. Fresh borrowing by the sample more than halved to Rs 1.74 lakh crore in 2014-15 from around Rs 4 lakh crore in 2013-14. At its peak in 2011-12, companies had raised fresh loans worth Rs 4.4 lakh crore.
Companies in the sample generated free cash flow of Rs 54,000 crore in 2014-15 but it was not sufficient to fund all expenses such as dividend, interest and loan repayment, leading to additional borrowing and a further deterioration in the leverage ratio. The net debt-equity ratio (debt minus cash and equivalent on books) rose to 1.2 in 2014-15 from 1.14 in 2013-14.
Some of the top companies that reported a turnaround in their free cash flow include Tata Steel, JSW Steel, Reliance Infra, Adani Power, Bhushan Steel, Adani Ports, Gitanjali Gems and GVK Power. In contrast, companies such as Reliance Industries, Aditya Birla Nuvo, Steel Authority of India, Aban Offshore and Dalmia Bharat Cement reported a decline in free cash flow as they stepped up capex.
A turnaround in India Inc's cash flow is the result of a process that began four years ago. The cash burn peaked in 2011-12 when capex exceeded internal cash generation by Rs 2.04 lakh crore. The numbers have improved every year since, due to a combination of higher internal cash generation and slowdown in new projects.
The annual cash flow from operations has nearly doubled in the past five years, to Rs 4.7 lakh crore in 2014-15 from Rs 2.53 lakh crore in 2009-10, outpacing the growth in capex and investment during the period.
Annual cash outlay on capex is up only 30 per cent during the period, growing at a compounded annual rate of 5.2 per cent, against a 13.1 per cent compounded annual rate of growth in cash flow from operations during the period. The companies in our sample accounted for 80.6 per cent, 69 per cent and 42 per cent of the universe of combined net sales, operating profit and reported net profit, respectively, in 2014-15. Their share in the combined gross block (investment in fixed assets) of the universe and gross debt were 88.9 per cent and 98 per cent, respectively.
Experts say if companies sustain this trend, there could be an improvement in corporate India's financial health a few years down the road. "What we see is a process of corporate de-leveraging that happens in any business cycle. There was a time when many companies leveraged excessively, betting on faster growth to take care of liabilities. Now as many of those assets are under-utilised, companies have either applied the brakes on new projects or are raising cash by selling unviable assets," says Madan Sabnavis, chief economist, CARE Ratings.
"Corporate de-leveraging is one of the essential steps towards growth revival and the process may take long. In the meantime, investment and demand will lag, resulting in poor economic and corporate growth," says Dhananjay Sinha, head, institutional equity, Emkay Global.
"In the last economic downturn of the 1990s, de-leveraging consumed most of the latter half of the decade and the process was finally over in 2003," Sinha adds.