Published by Indiainfoline.com December 14, 2015
Infrastructure Industry in India at Crossroads
The World Economic Forum has ranked India 71 out of 144 countries in the 2014 global competitiveness index citing poor infrastructure as one of the major reasons for this low rank. It is evident that if India aspires to be a key global player on the economic front, infrastructure development has to be taken up on a war footing. Unfortunately, even projects that have been initiated over the last few years (worth almost Rs.18 lakh crore) are stalled. Chronic delays have spiraled infrastructure companies into working capital cycles, which are among the longest in the world, putting pressure on cash flows leading to higher debt and lower returns 1 . According to the finance ministry’s mid-year report, private sector infrastructure companies across the board are all over indebted. Therefore, even if the incumbent government initiates new projects or expedites approval, the situation for many of these companies will continue to be dire. They may not be able to source the resources to undertake these projects. Many do not even have earnings to cover interest payments for their current debt. Moreover, the banking sector is increasingly unable to or unwilling to lend more money to this sector 2 .
Working Capital Crisis in Companies
Most of this debt is due to the high amount of working capital requirement. Even the best performing companies in this business (who have managed to have positive working capital) use 30-80% of their debt to finance working capital needs. This high working capital intensity is due to high levels of receivables and inventory. While this may be characteristic of the Infrastructure industry in India, an analysis of the major infrastructure companies over the recent years shows that there is more money stuck as receivables now than previous years (Refer to figure 1).
The situation has deteriorated substantially with the overall external liquidity crisis. On the face of it, it looks like a problem beyond the locus of control of most companies. However a closer examination of the financials tells us that companies are not helpless – and in fact, some of this wastage in working capital is actually self-inflicted.
It can be seen that the working capital situation of infrastructure companies goes through predictable swings over the different quarters of the year. These movements are linked to how the companies recognize turnover. Skewed sales every quarter-end and greater sales skew at the end of the last quarter of the year leads to unavoidably skewed working capital requirements throughout the year. The working capital situation deteriorates dramatically in the first quarter of every year for most companies (Figure 2).