CASH PILE OF BSE 500 COMPANIES RISES 17%
Afifth of Bombay Stock Exchange’s 500 constituents, including staterun Bharat Heavy Electricals and Lakshmi Machine Works, are sitting atop huge cash piles, thanks to prudent business practices that filled their coffers when the rest are squeezed by rising cost of funds.
Total cash with companies in the BSE 500 index, which represents 93% of the total market capitalisation of BSE shares, has risen 17% in the past fiscal, though the number of cash-rich companies has fallen to 100 from 116 a year earlier, a study by ET Intelligence Group shows.
The myth that most capital goods manufacturers are burdened with debt and higher funding costs in times of rising interest rates is also shattered with BHEL, Bharat Electronics, Siemens and Alstom Projects drawing comfort from their fat cash reserves.
For many of these, earnings from treasury operations are substantial and often these investment gains reflect in their net profit during tough times. These are also used to hand out hefty dividend payouts.
“Most corporate treasuries have large investments in liquid debt funds,” Tarun Bhatia, director (capital markets), Crisil Research, told ET recently. “Only companies with large surpluses will take some risk and invest in equities. These longterm investors expect just 14-15% returns on equity investments.”
The total cash pile of BSE 500’s Richie Rich has grown to . 128,500 crore from . 110,000 crore last year, excluding banks and NBFCs. NMDC, Infosys, Oil India, BHEL and Coal India are the top five companies in terms of cash balances adjusted for debts.
It is not just drugmakers and FMCG companies which are on top of the heap, even IT and extractive industries — mining and oil exploration — are on a strong footing. Holding Cash in Excess of Capital Needs
Many companies, such as BHEL, Bharat Electronics, Siemens and Crompton Greaves, hold substantial cash much in excess of what they need for capital investments or working capital requirements. BHEL, for instance, has always maintained huge cash reserves, which now stand at more than . 9,500 crore.
This surplus has prompted the state-run capital goods maker to attempt a model that the US conglomerate General Electric has mastered — a finance company that boosts sales. BHEL plans to float an NBFC that will lend to buyers of its equipments.
Bharat Electronics Limited bagged a large number of orders last year. For each order, it received about 15% of the contract amount as advance. This inflow has almost doubled its cash balance since FY10 to more than . 6,500 crore. The funds would be invested in modernising equipment.
Within this class of rich is a subclass of super rich companies. At least seven companies held cash in excess of their debt and net worth put together. These companies are able to work on high negative working capital, i.e., their suppliers or customers are funding them.
Leading these companies was Bharat Electronics, which ended FY11 with cash of . 6,519 crore — 1.3 times its total assets of . 4,346 crore. Others in the pack are Alstom Projects and Engineers India, who join the traditionally cash-rich Castrol, Colgate-Palmolive, GSK Consumer and GSK Pharma.
Having a little extra cash is always helpful during times of turbulence, as is the case now. But when a company’s capital is invested more in building a bank balance than in businesses, it could be worrisome. A number of them, however, have their strategies planned for the cash they carry.
For example, Infosys, which has a bank balance worth more than half of its total assets, follows a policy of carrying a year’s expenses in bank. The company, which spent Rs19,399 crore on its operations in FY11, has a cash pile of . 13,665 crore. In contrast, Hexaware maintains cash for potential acquisitions. The high cash balance of capital goods firms helps them provide payment flexibilities and win orders.
Still, several companies, particularly public sectors majors such as Oil India and Coal India, hold cash positions much in excess of their capital expenditure for the next few years. Container Corporation, for example, has a capex plan of . 600 crore for FY12 while its cash reserves exceed . 2,360 crore. Similarly, Oil India, which has a cash balance of over . 10,700 crore, plans to invest just . 3,200 crore in FY12.
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