Smaller auto component suppliers bore a larger impact from pandemic: Report – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/auto/auto-components/smaller-auto-component-suppliers-bore-a-larger-impact-from-pandemic-report/articleshow/82068434.cms?utm_source=ETTopNews&utm_medium=HPTN&utm_campaign=AL1&utm_content=23Synopsis

While the number of days for which these large companies held inventory and the number of days after which they received payment for sales went up on average during the 12 months ended September 30 last year, the number of days after which they made payment to their suppliers increased even more significantly.

Large listed automotive and auto component companies passed the financial burden of the lockdowns during the pandemic to their smaller suppliers by delaying payment, to improve their own cash cycles and fund short-term liquidity needs, says a new report.

While the number of days for which these large companies held inventory and the number of days after which they received payment for sales went up on average during the 12 months ended September 30 last year, the number of days after which they made payment to their suppliers increased even more significantly.

This effectively shortened their cash conversion cycles, or the time in which the investment in inventory was converted to cash flow from sales.

The report is based on 12-month trailing data of listed companies till September 30, 2020 and published by consulting firm EY.

For large automotive companies, the period for which payment to suppliers was outstanding went up from 61 days on average to 76 days, as per the report. This resulted in their cash cycles shortening by 13 days even after the impact of stockpiling of unsold inventory.

The companies effectively got excess cash on their hands to tide over the lean period at the expense of their suppliers.

For listed auto component companies that are suppliers to these automakers, cash cycles went down from 33 days to 27 days on an average. This, despite their cash inflows from automakers getting delayed, as they too delayed payments to their suppliers.

The outstanding payment periods of listed auto component companies rose 18 days to an average of 68 days in the 12-month period. These large component companies source parts from smaller manufacturers, known as tier-2 and tier-3 suppliers.

Ultimately, the burden of the stretched cash cycles was passed on to such smaller, mostly unlisted suppliers, said Naveen Tiwari of EY India, the author of the report.

“A number of businesses delay payments to the suppliers as a way of improving their own liquidity. Given the current economic situation, MSMEs still want their business relationships to continue with their customers despite the delayed payments impacting their working capital requirements,” Tiwari said. Payment terms are usually agreed upon in advance and typically range from 30 to 60 days, but vary largely depending upon the industry.

When looked across industries, cash cycles for large companies got longer by six days on an average and by one day for mid-size companies. But for small companies, these got longer by 14 days during the period under review.

Longer cash cycles represent an inefficiency in a business and the economy at large. It means businesses take that longer to convert revenue into cash. The cost of borrowed working capital eats into margins of such companies.

“If I reduce the cash cycle, I have more cash in hand. More cash in hand is the cheapest source of funding availability. It is cheaper than getting equity or debt from the market. That money you can use to invest in your company, in capex, in growth or acquisitions,” Tiwari explained.

The utilities sector too generated free cash flows by delaying payments to their suppliers, like power companies, and shortening their cash conversion cycles.

In other sectors like chemicals, retail and consumer products and technology, cash cycles became shorter on average due to demand generated because of the pandemic. For example, chemicals companies saw increased demand from the pharmaceuticals sector while retail saw sales go up due to ecommerce. Cash cycles for technology companies went up as clients across sectors sped up their digitisation drives in face of the lockdowns.

The situation worsened for sectors like power generation, metals and mining, pharmaceuticals, oil and gas, and engineering services.

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