What a decline in India Inc’s cash flow could mean for capex

The worsening trend of operating cash flow was mainly observed in capital-intensive sectors such as metals, cement, real estate and chemicals. This slowdown in operating cash flow is not good for corporate sentiment and may impact their investment/expansion decisions.

“In the current backdrop, the old adage, ‘topline is vanity, bottom line is sanity and cash flow is reality,’ holds well as far as corporate earnings are concerned,” said Prateek Parekh, vice president, institutional equities, Nuwama Wealth Management. fits with.” In the six months ended September 30, India Inc reported robust revenue growth of over 25% over a year ago; However, profits have been weak, and cash flows have contracted, as shown by Nuwama analysis. “It usually happens during recessions,” he said.

In addition, he believes that weakness in cash flow from operations points to inventory accumulation and receivables growth. “A decline in cash flows to capital-intensive sectors could be a harbinger of a capex slowdown, cost-cutting (lower wages of the formal sector) and consequent reduction in demand,” he said.

This means that if the operating cash flow is bad, it will affect the revenue growth of the companies. Also, what makes it difficult for companies is that the cost of borrowing has gone up.

“In a rising interest rate scenario, companies with poor operating cash flows may have to borrow more, which will constrain their overall earnings growth in FY23,” said Madan Sabnavis, chief economist at Bank of Baroda. He expects the operating cash flow of Indian companies to remain weak.

Meanwhile, company observations in sectors such as cement, paint and tires indicate that cost price inflation is moderating. However, the gains on operating margin would be visible in a few quarters. That said, the potential for meaningful earnings upgrades for Indian companies is limited, at least for now, given ongoing concerns about a possible global recession.