Auto firms' cash reserves zoom to Rs 46,000 crore on rising profit

Five companies have improved their cash and cash reserves by 23% in the first half of 2016-17

The country’s top five auto companies, including Maruti Suzuki, Bajaj Auto and Hero MotoCorp, are sitting on a large cash reserve of Rs 46,000 crore, thanks to increasing profitability. The five companies have improved their cash and cash reserves (including current investments) by 23 per cent in the first six months of 2016-17, taking the reserves in most of them to a new high.

Maruti Suzuki, the country’s largest carmaker, has a cash reserve and investment of Rs 23,800 crore as of September 30, Rs 4,600 crore more than it had on March 31, 2016, making it an increase of 24 per cent.

A company spokesperson said the increase was due to the cash profit earned during first half (H1) and gains on account of a fair valuation of investments under the new accounting norms that kicked in from April 1, 2016.

Maruti’s net profit in H1 of FY17 jumped more than 43 per cent to a record Rs 3,884 crore.

The spokesperson said the company had preserved cash to expand its sales infrastructure and logistics, introduce new models and invest in research & development (R&D), as it gears up to sell two million vehicles a year from 2020.

It will put in an additional Rs 2,000 crore in the Rohtak R&D facility by 2019, taking its investment to Rs 3,800 crore. Maruti Suzuki, which is controlled by parent Suzuki, is not making investments in the Gujarat plant. Suzuki is making investments, and capital expenditure (capex) of nearly Rs 6,000 crore has been sanctioned. Suzuki will sell vehicles to Maruti at the cost price and the latter will retail them. This strategy has been criticised by proxy advisory firm IiAS, which said that “excess liquidity” in the form of an investment portfolio was detrimental to shareholder interest, as Maruti Suzuki’s portfolio has generated lower returns than the return on capital employed.

Pune-headquartered two-wheeler major Bajaj Auto is holding cash and cash reserves worth Rs 11,398 crore as on September 30, 25 per cent more, compared to March 31. Bajaj reported the highest half-yearly turnover; Ebitda (earnings before interest, tax, depreciation and amortisation) and profit in H1. Its consolidated profit in H1 was a record Rs 2,240 crore.

Soft raw material prices and improving volumes have helped most auto companies post record profits in H1, though second half may bring challenges due to demonetisation. Some may turn close-fisted as regards cash usage.

An analyst said a company preferred to hold cash to meet exigencies and be prepared for potential investments. “This is especially true of Indian information technology firms.”

The cash reserve of the country’s largest two-wheeler maker, Hero MotoCorp, increased to Rs 4,000 crore as on September 30, against Rs 3,700 crore on March 31. The company invested Rs 850 crore in its R&D facility in Jaipur, which became operational early this year. Its capex of Rs 1,300 crore in 2016-17 will be in the upcoming plant in Gujarat.

Eicher Motors, which manufactures Royal Enfield motorcycles, has had the sharpest growth in the cash position. During the six-month period ending September 30, its cash reserve surged more than 39 per cent to Rs 2,945 crore. This comes again on the back of a record profit in H1. The company’s capex will be Rs 1,000 crore this year.

Utility vehicle and tractor major Mahindra & Mahindra (M&M) has also seen a 20 per cent surge in cash (including current investments) to Rs 3,945 crore as on September 30. Its profit grew 20 per cent in H1 to Rs 2,118 crore on the back of improving tractor and sport utility vehicle sales.

Maruti Suzuki announced a dividend of Rs 35 a share in 2015-16, 40 per cent more than 2014-15. The trend is likely to continue this year as well. Eicher doubled its dividend to Rs 100 last year. Some are trying to bring down borrowings.

M&M last year repaid Rs 1,298 crore from internal accruals.