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Capital goods companies working capital need at 5-year high: Crisil


Capital goods companies wkg cap need at 5-year high: Crisil
A CRISIL study of 50 capital goods entities (engaged in equipment manufacturing and construction) indicates that the sector's credit quality has come under strain, with working capital requirements surging to a five-year high.

The pressure on this sector is primarily due to the deferment of large capital investment plans since 2011-12 (refers to financial year, April 1 to March 31) by several end-users.


The resultant build-up in inventory and delay in release of payments by customers has led to a tight liquidity. The weakening credit risk profile of these entities assumes importance as the capital goods sector acts as a lead indicator, signaling increased pressure on other sectors as well as the overall economy.

Says Nagarajan Narasimhan, Senior Director, CRISIL Ratings, "Project deferment by customers resulted in a 15-per cent decline in order inflow for capital goods entities in 2011-12 over the previous year. The reasons for deferment in projects include demand slowdown, increase in project costs and interest rates, and lower cash flows. In addition, working capital requirements have increased substantially; the gross current asset (GCA) days of a sample of 50 listed mid-sized players have increased to 370 as on March 31, 2012, from 280 as on March31, 2009, the highest in the past five years."

GCA days refer to gross working capital expressed as number of days of sales and the sample of 50 companies accounts for a-third of the revenues of all CRISIL-rated capital good entities.

The liquidity of the players has been affected as a large portion of the incremental working capital needs has been funded either through delayed payments to suppliers or through high-cost short-term debt. The larger borrowings and prevailing high interest rates have weakened the debt protection metrics of these companies. The interest cover (profit before depreciation, interest, and tax/interest,and finance charges) of companies in the sample set declined to 2.8 times in 2011-12 from 4.1 times in the previous year. The ratio of cash flows from operations to total debt also declined sharply, to a negative 0.30 times from 0.07 times during the same period, indicating that cash from operations is inadequate for servicing debt.

Read more about: crisil
Story first published: Thursday, August 2, 2012, 11:14 [IST]
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