Cash-rich, capex-shy: New analysis puts the spotlight on India Inc’s dilemma

India’s largest listed companies were able to generate steady cash flows from their operations in 2023-24, with the aggregate figure for a sample of 416 BSE 500 firms surging 26.4% and crossing ₹10 trillion, likely for the first time, a Mint analysis showed. This marks a welcome turnaround after two weak years, and fuels optimism for future expansion. The analysis excluded the banking, financial services and insurance (BFSI) sector.

“The surge was driven by an improving demand scenario, as scars of the pandemic finally faded last year and easing input cost pressures that boosted margins," said Anitha Rangan, an economist at Equirus.

The oil and gas segment alone accounted for nearly 52% of the overall increase in internal cash generation in 2023-24, primarily driven by increased operating leverage with an improvement in operating margins. The other key contributors were the automotive sector (12% share in the increase), construction and real estate (10%), metals and mining (8%), and information technology (6%).

Altogether, nearly 90% of the companies in the sample saw their operating cash flows increase, against around 88% in the previous fiscal year.

Investment-shy

While cash is flowing in, the investment spigot is still shut tight. These companies’ total expenditure on purchase of fixed assets—an indicator of capital investments—grew only 10.7%, against nearly 20% in the last two years, marking the slowest post-pandemic growth. Net fixed assets—assets after accounting for depreciation and liabilities, another indicator of investments—also rose at just 6.5%, against 7.2% in 2022-23.

The oil and gas sector accounted for more than a quarter of the increase in the purchase of fixed assets, though with a declining share. Metals and mining and power accounted for another 20%. Construction and real estate, fast-moving consumer goods and textiles were the only three sectors that saw their capex share increase.

However, there are pockets of growth. Investment in traditional sectors may have taken a backseat, but new-age assets and services such as logistics, warehousing, tourism, infrastructure and transport are seeing progress and the desire for investment, Rangan said.

Also read: Can India Inc strong balance sheets nudge investments?

Capex awakening?

Though businesses are still warming up their investment engines, there's a growing rumble close by. Cash flow from operations was three times the capital expenditure in 2023-24, up from 2.6 times in 2022-23. This ratio shows how efficiently a company uses its cash flow for expansion: a higher ratio means businesses are preparing to unleash a wave of capital spends, but are being cautious for now.

“The private capex cycle is picking up, but is expected to be measured rather than excessively exuberant," noted Kinjal Shah, senior vice president and co-group head for corporate ratings at Icra Ltd.

There’s another glimmer of hope. Free cash flow, or the operating cash flow left over after capex, is at a comfortable of ₹7 trillion for the sample, indicating financial stability. The figure has jumped 36% after staying relatively flat in 2021-22 and contracting in 2022-23. Around 62% of these companies have seen an increase in free cash flow, which could propel their growth.

Also read: Why India Inc’s capex plans slowed down in FY24

The government's unwavering capital spends have charted a course for calmer waters for the economy, and calls for the private sector to follow suit are at fever pitch. “Improvement in balance sheets of corporates and banks puts the economy at a juncture to support capex," Rangan said. “With the much-awaited rural recovery ongoing, we should see other sectors also participate in the capex cycle."

With cash registers ringing, India Inc is now in a better position to not only fund its working capital needs, but also consider substantial capital investments. But this newfound financial muscle could reduce companies’ need for fresh borrowings. Watch out for the concluding part of this series tomorrow to learn more about this.

This is the second part of a three-part data journalism series featuring a corporate health check-up in the post-pandemic period. The first part covered the profit concentration of India’s largest firms.