A lot of Indian Corporates have surplus cash and this is what they do with it.

The mid-90s saw an almost insatiable appetite for funds by most Indian corporates. Expanding businesses, growth plans and fresh ventures not only absorbed internal accruals but also resulted in large debt exposures. There was little surplus cash in the system and available surplus cash was routed to safe avenues like government bonds, subscribing to debt papers floated by corporates and financial institutions. The yields were acceptable and reasonable on risk-reward parameters.

Towards the end of the 90s the feel good factor had become depressed. The new projects established in the mid-90s at high interest rates seemed unsustainable and the obvious reaction was one of extreme caution. Expansion or new projects became fewer. This situation was aggravated due to the recessionary trends in the US and the September 11 strike. The period also marked low valuations in the bourses.

The traditional avenues became unattractive due to falling interest rates and low yields. Large corporates, which generated substantial cash, began to explore various options for deployment. We looked at a sample of large Indian Corporates of which 4 were in the IT sector and the remaining in the “old economy” segment. Categorising the assets into 2 segments assists in understanding the issues better:

1. Net Fixed Assets & Business Current Assets of debtors & receivables- representing the core assets of the business

2. Cash, Investments & Advances to group companies – part of which represents the surplus assets of the company

While not all of the above can be regarded as surplus, this table provides a very good insight on the accretion to these assets and increasing preponderance of these assets to business assets.

Before we discuss the visible trends of cash deployment, it is important to note what did not happen, just as the significance of the curious incident of the dog not barking in one of Sherlock Holmes’ adventures.

Few of the above companies have retired debt though the debt/equity ratios across the board are plunging southwards. While analyst reports state many companies have reduced their debt exposure, interestingly, it is the multinational corporations (MNCs), who besides buying back their shares have also taken the lead in reducing their debt. Some of the companies that have retired debt using excess cash include ITC, VST, HLL, FAG Bearings, Gillette, Bayer, Thomas Cook, Novartis, Whirlpool, Philips, Wockhardt.

The debt/equity ratio of the large Indian Corporates in our sample (excluding those in the IT sector) was more or less the same for most of the companies. This however does not preclude that some of the companies may have replaced higher cost debt with lower cost debt.

In light of this, we explored as to what happened to surplus cash. Some of the visible key trends of cash usage noticed in the traditional companies are:

Consolidation of promoter holding

Britannia, Hindalco, Siemens, Indal, Kodak, Axles India, MIRC, D-Link etc., declared buybacks to use funds of the corporate to enhance value to remaining shareholders as well as increase promoter stake in the company. With buyback norms becoming simpler, the number of such consolidations has seen a significant increase. TISCO acquired shares of TELCO, thereby improving the group’s holding in the Company.

In addition a number of mid-cap companies such as Sterlite Industries, Reckitt Benckiser, Cadbury, Bharat Hotels, Philips have used the buy-back option to de-list from the market. While most have quoted inadequate valuations in the

market for exercising this option, the amount of surplus funds in the company and the perception that capital market cannot be expected to be an attractive source of funds in the near future, management sees very little benefit in broad-basing equity, providing data to the exchanges or ensuring adherence to SEBI’s norms.

Fresh acquisitions

Though more visible in the IT sector (HCL Tech acquired Aquila, WIPRO acquired Spectramind), other companies haven’t been lagging given right opportunities. Grasim acquired a stake in L&T, which it recently hiked. Grasim also acquired Melodeon. Britannia entered into a JV with Fonterra for dairy products. Tata Power is eyeing Dabhol Power Corp and is also planning to raise a substantial amount of funds for acquiring brown field projects. Post-acquisition VSNL’s proposed investment in Tata Tele has been adequately covered to be explained further.

Participation/ Planned participation in Government divestments

The Tatas have been unusually aggressive in participation in divestment of PSUs, with Delhi Vidyut Board being the latest. Hindalco is conserving its cash & energies for NALCO as is L&T for EIL. With PSUs such as BHEL, NTPC, etc., in the pipeline we are likely to see creation of a war-chest by the bigger corporates.

To conclude, driven by low growth & consequent low needs of cash in current businesses and poor yields in the debt market, corporates are using surplus cash to explore strategic options in terms of acquisitions, consolidation of holdings, etc. The shift from accent on organic business to accent on strategic consolidations is clearly visible.

(This article, contributed by P.N.Sudarshan & N.M.Gattu of Deloitte Touche Tohmatsu, represents the views of the authors and does not necessarily reflect the opinion of the organization or its associate firms. All data provided or used for analysis have been obtained from published sources only. Feedback can be mailed to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it )\n This e-mail address is being protected from spam bots, you need JavaScript enabled to view it )"

Issue BG17 Aug02

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