“To enhance their currency cycling and fund their short-term liquidity requirements, large listed car and vehicle companies have delayed their payments for the financial lockdowns during the pandemic. While their inventory of large companies and their payment payments for sales increased on average over the 12 months ended September 30 of the last year, the number of days after payments were made to suppliers increased even more. This reduced their cash conversion cycles effectively or converted investments into cash flows from sales”, said Naveen Tiwari, Operational transactional services in EY India.
“For the large car companies, the payment period for suppliers has increased from an average of 61 days to 76 days, as stated in the report. The cash cycles were reduced by 13 days even after the effect of the inventory stockpiling. The firms got excess cash at the expense of their suppliers over the lean period. Cash cycles decreased from 33 days to 27 days on average for the listed automotive component companies that are suppliers to such automakers. This is, despite their cash inflows, as payments to their suppliers are too late”, said Naveen Tiwari.
“In the 12 months, the non-payment periods for listed car components companies were increased by 18 days to an average of 68 days. Smaller manufacturers, known as Tiers 2 and Tiers 3 suppliers provide parts for these major component companies, some companies delay payments to their suppliers to improve liquidity. Given the economic situation today, despite late payments affecting its working capital requirements, MSMEs still want to continue to work with their clients. Payment terms are usually agreed in advance and usually run from 30 to 60 days, but largely vary from the industry. Payment terms are not agreed upon”, added Naveen Tiwari.
“Cash cycles were looked at for big companies by an average of six days, and medium-sized companies by one day. In the period under review, these were more than 14 days for small companies. In a business and the economy in general, longer cash cycles mean inefficiency. It means that companies will need to convert income into cash longer. These companies are marginally affected by the cost of loans of working capital. I have more cash in my hand if I cut the cash cycle. The cheapest source of funding available is more cash in hand. It's less expensive than getting the market share or debt. You can make use of that money to invest in your company, Capex, growth, or takeovers”, he stated.
The utility industry has also generated free cash flows by deferred payments to its suppliers, such as power firms, and shortened cash conversion cycles. Cash cycles were shorter on average in other sectors, such as chemicals, retail, consumer products, and technology due to the pandemic demand. Chemical companies have witnessed increased pharmaceutical demand, for instance, while e-commerce has resulted in increased retail sales. Cash cycles have increased for technology businesses as customers in all industries have accelerated their scan drives in the face of lockdowns”, said Naveen Tiwari. “The situation has deteriorated for sectors such as electricity generation, metals and mining, the pharmaceutical sector, oil and gas industry and engineering.
And also Lack of workers during the pandemic could accelerate the automation of low-paid jobs in India, which attracts millions of unskilled employees. That could be another headache for politicians as the nation struggles with unemployment. But it is a survival issue for the USD 57 billion automotive component sector, which employs almost 5 million. Before the outbreak too.