ET Intelligence Group: Free cash flow (FCF) of 98 manufacturing companies in the BSE 200 index turned negative in FY19 for the first time since FY13, showed data from Bloomberg. FCF, which is the cash left after paying for operating expenses and capital expenditure (capex), reflects the ability to invest in future growth. It was negative Rs 13258 crore (cash outflow) in FY19 compared with over Rs 73632 crore in FY18 and much lower than the peak of Rs 1 lakh crore in FY16. About a third of the sample companies reported negative cash flow.

A negative capex during the times of buoyant demand is desirable since it is an indication that the companies are building adequate capacities to cater to future demand. However, when the demand scenario is bleak, capacity utilisation is low. It means return on invested capital will be lower than anticipated thereby straining the balance sheet.

“Falling FCF is a worrying sign for the health of the companies amid sluggish demand as it shows pressure on revenue and operating margins,” said the chief investment officer of a leading domestic mutual fund.

Capex by large companies in the energy sector including Reliance IndustriesNSE -0.17 % (RIL), Indian oil (IOC), NTPC and Power Grid Corporation was the major reason for drop in FCF. The FCF of the energy companies was negative Rs 26573 crore in FY19 compared with average positive free cash of Rs 41879 crore in the previous five fiscals. If one excludes the negative free cash flow of RIL, the sample’s FCF improved to Rs 56409 crore from the negative reading. Still, it was the lowest since FY14.

The sample companies undertook Rs 4 lakh crore worth of capital expenditure in FY19, the highest in the last six years. The cumulative capex in the past five fiscals was Rs 24.5 lakh crore. In addition to the bulging capital expenditure, the sagging demand across sectors lowered return generated from the existing asset base.

Cash flow snip 1

The sample’s asset turnover ratio — a gauge of how frequently assets have been used — fell to 1.5 in FY19 from 1.8 five years ago. The average receivable days increased by three days to 49 during the period.

“PMI data suggest that companies extended credit terms to their debtors to support revenue growth. Also, debtors are taking more time to pay,” said Prithviraj Srinivas, economist, Axis Capital.

Two major consumer companies Hindustan UnileverNSE -1.87 % and United SpiritsNSE -1.66 % have indicated after their second quarter earnings that there is pressure on liquidity in the system, which is affecting revenue growth.

On the positive side, given that RIL, the biggest contributor to capex, is nearing the end of the capex cycle, the situation is expected to improve from hereon. RIL incurred a capex of Rs 41722 crore in the first half of FY20 compared with Rs 72506 crore in the corresponding period of the previous fiscal. According to Bloomberg estimates, the sample is expected to clock Rs 1.6 lakh crore free cash flow in FY20.