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India Inc sitting on huge idle cash

P Vaidyanathan Iyer

Several Category A companies which have published their annual reports for 2000-01 have piled up huge cash balances. While cash at hand is a positive indicator of liquidity, an excess of cash has a telling affect on the return on capital employed.

Amongst the old economy companies, Hindustan Lever Ltd and Reliance Industries top the list with their average cash and bank balances at Rs 6.66 billion and Rs 5 billion, respectively, for the year-ended March 2001.

It is the high cash to current assets percentage (which gives an indication of a company's liquidity position) of many of these companies which needs to be looked at, analysts say. For HLL and Reliance, it stands at over 19 per cent and 9 per cent, respectively. The opportunity costs of maintaining cash rise as the cash balance increases, analysts say.

Not only are the companies high on cash and bank balances, the investments made by several of them are also huge. Reliance Industries, Hindustan Lever, Tata Steel, Grasim Industries, Raymond and Larsen & Toubro amongst others have substantial investments in various funds, government securities, bonds and their subsidiaries.

Significantly, both Reliance and HLL's investments are also huge. While Reliance's investments as on March 31, 2001 stand at Rs 65.28 billion, that of HLL is 14.50 billion. Tata Steel, Grasim, Indo Gulf and Larsen & Toubro too show significant cash balances at Rs 2.36 billion, Rs 1.07 billion, Rs 670 million and Rs 1.80 billion, respectively.

The information technology or software companies, including Infosys Technologies, Wipro Ltd and Satyam Computer, not surprisingly, beat most of the old economy companies in running huge cash balances. Cash as a percentage of current assets is as high as 25 per cent in case of Infosys for the year-ended March 31, 2001. Satyam and Wipro follow Infosys closely with cash to current assets ratio of 19 per cent and 15 per cent respectively.

Infosys, Wipro and Satyam had raised substantial money by tapping overseas markets in the last two years. The US slowdown, however, put a dampener on many of their investment plans including takeover and acquisitions.

The overall slowdown in the economy over the last 18-24 months too has impacted India Inc's investment plans. Several companies are not going ahead with their expansion plans with the shadow of a recession looming large. "This also explains the high cash and investment figures of the old economy companies," said a fund manager with a leading domestic mutual fund.

"If companies maintain such huge cash positions for a span of time extending over 8-12 months, then it does affect the overall return on capital," he added.

If a firm maintains a small cash balance, it has to sell its marketable securities (and perhaps buy them later) more frequently than if it holds a large cash balance. Hence, the trading or transaction costs tend to diminish if the cash balance becomes larger. This is however little compensation for the opportunity cost of investment and the hit on RoCE, he said.

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