Companies see cash as king, cut capex plans

MUMBAI: Bogged down by the coronavirus-related lockdowns, India Inc has decided to adopt a strategy of financial prudence for the new fiscal year. As costs remain constant while incomes decline, companies across sectors are revisiting their capital expenditure (capex) programmes. ‘Cash is king’ is the new mantra corporates are strictly abiding by, as they delay heavy investment plans, revise their sales budgets and bring their cost plans to a new realistic Covid-19 normal.JSW Energy director (finance) Jyoti Kumar Agarwal said the company is revisiting all its plans, operational as well as strategic, in light of the pandemic. “Much like non-essential travel, we have decided to put off any non-essential, discretionary expenditure for the moment. We are also redrawing our strategic road map in the near term while keeping a nimble approach given the rapidly evolving circumstances. While we do have sufficient liquidity to last through a prolonged dislocation, we would nevertheless prefer to conserve as much capital as possible given the unprecedented nature of the situation.”Some industries, like cement, move in tandem with the GDP growth numbers. “We expect this quarter of fiscal 2021 to be a damper for the industry and hope to see strong signs of revival in the third quarter,” said Birla Corporation COO Sandip Ghose. Normalcy could return only in the fourth quarter. “Costs that are postponable, will be postponed. When we are not selling anything, we don’t need to spend on on-ground marketing activities,” said Ghose. Power and transportation form high costs for the cement industry, while labour runs in single digit rates. “If plants are not run at optimal capacity, production costs will go up. With the market not able to pay higher prices for the cement bags, players, which operate on thin margins, will be in a bind,” said Ghose. TCS, which saw a dip in its fourth quarter profit of fiscal 2020, sees margin contraction in the short term. It is looking at costs across the board, which includes slashing travel expenses and suspending salary increments. Rajesh Gopinathan, CEO of India’s largest IT services player TCS, expects the peak impact of the virus outbreak to reflect in the current quarter’s earnings and sees TCS’s financial performance returning to normalcy in the third quarter of fiscal 2021. 75369948The FMCG sector too has been impacted by the Covid-induced lockdown. Godrej Consumer Products MD & CEO Vivek Gambhir said, “Ensuring sufficient liquidity and a strong cash position is an important priority. Major capital expenditure decisions will get deferred by companies till there is more clarity in the evolving environment. Maintenance and capital expenditure for incremental capacity expansion and lines for new products launches will continue.”Although food is an essential commodity and there’s increased demand, factories are functional only partially as there are constraints on raw material, packaging and labour. Mother’s Recipe-Desai Foods executive director Sanjana Desai said, “We would need to revise our sales budgets and purchase forecasts for at least the next few months, as we expect the global recession to hit hard.”But largest biscuit-maker Parle Products plans to stick to its capacity addition plans this year. Executive director Arup Chauhan said, “We are currently in excess of 75% of our production levels with 50% worker strength. Production is ramping up every day. Stocks in the pipeline are moving really fast now and we believe, given that nutrition is going to be key for consumer health, we will increase our capacities by 20% this year.” Costs that companies will target could include fresh hiring, rentals, training & development budgets and salaries. Valuations in M&As (mergers & acquisition) may also decline. Executive Access India MD Ronesh Puri said, “Hiring will take a back seat and that will hit our industry. Some companies are struggling to pay salaries, and some are even thinking of vacating large rental places and shifting to smaller ones to save on costs. Salaries are either being staggered, or cut, or employees furloughed.” Chauhan of Parle Products, however, said, “Even if working capital is impacted, we are not cutting salaries or jobs. On the contrary, we are motivating our workers and employees and assuring them of benefits as well.”The impact on M&A activity would be mixed. Singhi Advisors MD Mahesh Singhi said, “Most companies will start re-assessing their business portfolios and de-leverage their balance sheets by selling off assets generating returns below certain threshold level. The increase in availability of assets will enable well-capitalised buyers to cherry pick these and structure transactions with staggered payouts and, in turn, lower risk-adjusted valuations.”Lower valuations will be expected by most strategic buyers since their own valuations would have dropped in the falling markets and risk perceptions would have changed. “We can expect increased PE-backed M&A transactions for companies building up capacities through acquisitions to meet increased traction and areas where global de-risking will be required where China has a monopolistic position,” said Singhi.According to Gambhir, this will be a good opportunity to scout opportunistically for M&A. “Companies that have strong balance sheets could find interesting companies to consolidate their presence in existing categories or enter new categories. Some of the smaller players could find the terrain more challenging over the next few quarters and may look to sell,” said Gambhir.Enhanced M&A activities will be seen in growth sectors like speciality chemicals, electronic manufacturing, pharmaceuticals, healthcare services and medical consumables. “We may also see need-based/compulsive deals in beaten down sectors like auto components, commodity packaging and metal processing. However, finding a buyer in such situations will be equally difficult,” said Singhi.

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