Working Capital Management Report 2021

All Tied Up
Working Capital Management

Report 2021 — India
E n te r
Contents
Contents
About the report 03
Executive summary 04
1. Need for a focus on working capital 05
2. Working capital overview for India 07
3. Sector insights 12
4. How EY can help? 19

About the report
About the
report
Author EY All-Tied Up is a publication in a series of working capital management • The EY All Tied Up results for India are based on
Methodology
reports based on Ernst & Young LLP (EY) research on working capital an analysis of working capital performance of the
performance of India’s largest companies. largest 500 companies as per revenue as listed in
the BSE Stock Exchange.
• Companies in the financial and real estate

What is the impact of COVID-19 on working capital for India Inc? sectors have been excluded from the analysis for
comparability reasons.
• The sample constitutes a total revenue of ₹62.4

What measures were taken by businesses to optimize their working capital?
lakh crores, EBITDA of ₹9.2 lakh crores and Short
Term Debt of ₹6.7 lakh crores.
Naveen Tiwari How to leverage technology for working capital management? • The sector analysis includes top 12 sectors
Partner and Head, consisting of over 90% of revenue of the sample.
Working Capital Practice, • For the purpose of size segmentation, the rank
Ernst & Young LLP How can businesses approach working capital management in the future? ordered data set has been divided into 3 groups
as per percentiles, using FY20 revenue as an
indicator for each company’s size.
Working Capital Management Report 2021 — India Page 4
Executive summary
Executive summary
There is a considerable need for Indian
Sectors which experienced improvement
companies to focus on working capital
in C2C
optimization
2 pp* 6 days Automobiles Chemicals Cement &

Building Products
Overall Cash Opportunity
Deterioration in working Deterioration for India Inc
capital as a % of revenue in C2C
13 days 12 days 7 days
India Inc observed a delayed collections

and supply chain disruption across sectors
as a result of the pandemic
Automobiles, Chemicals and Cement
& Building Products were the best
performing sectors in C2C in India
₹ 5.2
trillion
Large enterprises are able to effectively Sectors which experienced deterioration

manage their working capital in C2C
About the report
29 days
Executive summary
Power Engineering & Oil & Gas Cash on

Need for a focus on working capital EPC Services the table
Difference between C2C of
large and small enterprises 34 days 17 days 10 days
Working capital overview for India
Sector insights
Large enterprises enjoy better leverage as Power, Engineering & EPC and Oil & gas
well as have automated processes in place were the worst performing sectors in C2C
for better working capital management in India
How EY can help?
Note: All comparisons are for LTM 30-Sep-20 vs 12 months ended 30-Sep-19
*percentage point Improved Deteriorated
About the report
1 Need for a focus on
working capital
Executive summary
Need for a focus on working capital
Sector insights
How EY can help?

Firms must optimize working capital and free-up cash in the wake of
the COVID-19 pandemic
Need for working capital optimization
Revenue growth & EBITDA margin trend Working capital as a % of revenue trend
18% 12%
15% 15% 15% 15% 12%
15% 11% 11% 10%
11%
-1%
FY17 FY18 FY19 12 months LTM FY17 FY18 FY19 12 months LTM
30-Sep-19 30-Sep-20 30-Sep-19 30-Sep-20
-12%
Revenue growth EBITDA margin
Interest coverage trend Short term debt/sales trend
5.5 5.5 5.4

5.0 11.1% 10.9%
4.4 10.9% 10.8%
About the report
9.8%
Executive summary
Need for a focus on working capital FY17 FY18 FY19 12 months LTM FY17 FY18 FY19 12 months LTM
30-Sep-19 30-Sep-20 30-Sep-19 30-Sep-20
Sector insights • While companies were able to maintain their EBITDA margins, revenue growth declined drastically as a result of the pandemic
induced lockdown
How EY can help?
• Falling revenue was combined with an increase in working capital as a % of revenue, mainly due to substantial impact of
lockdown across the value chain
• Falling revenues and increasing working capital requirements have pushed up the need for increase in short term debt funding
About the report
2 Working capital
overview for India
Executive summary
Sector insights
How EY can help?

The pandemic caused significant challenges in managing working

capital due to supply chain disruptions
C2C trend for India Inc
44
43
40
39 38
• There has been a steady improvement in overall

Cash to Cash cycle (C2C) between Mar-16
(FY17) and Sep-19
FY17 FY18 FY19 12 months LTM
30-Sep-19 30-Sep-20 • However since March 2020, the COVID-19
pandemic has disrupted working capital
management for all companies, which has
significantly increased the overall Cash to Cash
Cycle
51
48 47 47
About the report 44 43
• The deterioration in C2C by Sep-20 has been
42
38 driven by c.15% increase in DSO and c.9%
increase in DIO, partially offset by c.8% increase
Executive summary
in DPO
C2C DSO DIO DPO

Sector insights
12 Months 30-Sep-19 LTM 30-Sep-20
How EY can help?
India Inc balanced its working capital requirements during the

pandemic by stretching payables to offset increased inventory
balances and reduced collections
Breakup of working capital for India Inc
DSO trend
48
47 48
46
42
55%
45%

30-Sep-19 30-Sep-20
• During COVID-19, receivables days increased for
more than half of the businesses, as companies
sought to preserve cash and extend credit
DIO trend
periods, combined with loss of revenues during
47 the period (due to subdued demand)
46
45 • c.66% of companies reported significant increase
43 43 66% in inventory days (combined with decrease
30%
in revenues). This appears to be mainly due
About the report to unsold inventory, as well as companies
FY17 FY18 FY19 12 months LTM maintaining additional inventory buffer to
Executive summary 30-Sep-19 30-Sep-20 mitigate the supply disruptions
• c.69% of the business stretched their payables to
maintain acceptable levels of short term liquidity
DPO trend
Working capital overview for India 54
50 51
50
Sector insights 47
31%
69%
How EY can help? % companies for which the metric
Improved in LTM 30-Sep-20 vs 30-Sep-19
30-Sep-19 30-Sep-20 % companies for which the metric
deteriorated in LTM 30-Sep-20 vs 30-Sep-19
The biggest impact on working capital has been for small companies
during the pandemic due to lack of scale, processes and systems
Working capital performance as per size
LTM 30-Sep-20
77
72 70 69 70
66 64 63
50 • There continues to be a significant difference
46 45
41 in overall C2C days between large, medium and
small enterprises.
• Larger enterprises are more efficient in managing
their working capital as these businesses:
• can leverage their scale and demand longer
C2C DSO DIO DPO credit periods from suppliers
• use their selling power to have a higher
inventory turnover
• have automated invoicing and collections
12 Months 30-Sep-19
processes
About the report • efficient business processes to track and
71 proactively manage overall cash and working
66
Executive summary 57 capital
56 57 53 54
51 • The biggest impact on working capital has been
47
Need for a focus on working capital 40 42 for small enterprises during the pandemic due to
35
lack of the scale, processes and systems
Sector insights Large sized companies: FY20 revenue greater

than ₹51 billion
C2C DSO DIO DPO
How EY can help? Medium sized companies: FY20 revenue >
₹24 bilion and < ₹51 billion
Small sized companies: FY20 revenue lower
than ₹24 billion
Indian companies have significant opportunities to implement better

working capital practices when compared to advanced economies
Working capital performance as per geography
• Compared to developed economies, Indian

companies have significant opportunities to
implement better working capital practices
India US UK China Brazil • Improvement in working capital will release cash
FY20* in several sectors including Power, Technology
and Consumer & Retail with highest C2C as
DSO 42 38 38 57 53 compared with the advanced economies
• DSO for the Power sector was more than 5 times
higher than the other 4 countries, leading to the
DIO 43 32 33 58 36 highest C2C
• C2C for the Technology sector, mainly driven by
About the report a high DSO, is the highest compared to advanced
DPO 47 38 38 72 43 as well as emerging markets
Executive summary • In addition, higher levels of inventory by Indian
Retail & Consumer companies have driven
Need for a focus on working capital C2C 38 32 32 43 46 higher working capital needs as compared to the
US, Europe and China
Sector insights
How EY can help?
Source: EY analysis
*Year ending December 2019 / March 2020
About the report
3 Sector
insights
Executive summary
Sector insights
How EY can help?

Deterioration in C2C days was led by reduced collections for the

Power sector and inventory build-up for the Pharma sector due to
supply chain disruptions
Working capital performance as per sector
Power
115 122
• Being an essential service, plant operations
100
in the sector were not significantly impacted
81 during COVID
78%
45 22% • However, for c.78% of the companies there was
37
26 30 a deterioration in receivables predominantly
driven by decrease in bill collections from end
consumers
C2C DSO DIO DPO
Pharmaceuticals
About the report

110 114
• Being essential services, the sector remained
Executive summary 83 88 largely operational. Though c.72% of the
76 78
72% companies experienced increase in C2C days
Need for a focus on working capital 49 52 28%
• Intermediates, API and FDF manufacturing
business experienced inventory build-up, supply
Working capital overview for India chain, transport and labour disruptions
C2C DSO DIO DPO
Sector insights
How EY can help?
% companies for which C2C Improved in % companies for which C2C deteriorated
LTM 30-Sep-20 vs 30-Sep-19 in LTM 30-Sep-20 vs 30-Sep-19
Auto OEMs extended payables to offset significant reduction in sales

and a diversified product portfolio helped the Chemicals sector
increase its resilience
Automotive
76 • Despite significant reduction in sales/ revenues

61 due to lockdown and disruptions in distribution
38 41 network, Auto OEMs improved their C2C days by
23 22 25% extending supplier payments
75%
0
• Post lockdown and reopening of production
facilities, companies realigned their production
-13
levels to compensate for the loss of sales volume
C2C DSO DIO DPO
Chemicals
About the report • c.53% experienced an improvement in C2C

days mainly driven by increased demand in
Executive summary 88 some of end use sectors such as pharma, food
76 80 80 packaging, sanitary and medical applications
69 65 69
61 47% (e.g. sanitizers etc.)
Need for a focus on working capital 53%
• Further, short term supply disruptions from
Working capital overview for India China led to increased order inflows from global
companies which had a positive impact on the
C2C DSO DIO DPO DIO
Sector insights
How EY can help?
A shift to online sales channels and digital investments by

businesses drove improvement in C2C days across Retail and
Technology sectors respectively
Technology
• Technology sector saw increased activity as

84 companies accelerated digital investments to
80
65 support business continuity during the pandemic
61 37%
63% • The accelerated digitization by businesses led
23 overall increase in revenues for the Technology
22
4 sector, thus driving down the C2C for majority of
3
companies (c.63%)
C2C DSO DIO DPO
Retail & Consumer Products
About the report

• Increased sales through e-commerce and MT
Executive summary channels complemented by focused initiatives
47% has resulted in an improved DSO days
Need for a focus on working capital 49 50 46 44 53%
36 35 33 29
• DIO in the sector remained broadly stable as
decrease in sales of non essentials was largely
Working capital overview for India offset by increase in sales of essential products
C2C DSO DIO DPO
Sector insights
How EY can help?
Inventory pile-up drove significant deterioration in C2C days for

Metals & Mining while Cement businesses stretched their payables
to preserve working capital
Metals & Mining
• 62% of Metals & Mining businesses experienced

a deterioration in C2C days primarily driven
by muted demand across infrastructure and
75 73 automobiles sectors
66 62%
55 38% • DIO across the sector increased as plants
40 41 39
29 continued to produce at a minimum viable
capacity, irrespective of off-take during
the lockdown period to prevent expensive
C2C DSO DIO DPO shutdowns
Cement & Building Products
About the report • Post lockdown government projects, rural/

sub-urban areas and North India, led demand
recovery due to labour availability
Executive summary
• Businesses preserved cash through focused
37%
Need for a focus on working capital 47 54 53 63% collections, offering stricter credit terms to
40 42 46
35 33 customers and delayed payments to suppliers
Working capital overview for India • DIO across the sector decreased due to lower
inventory valuations driven by drastic decline in
C2C DSO DIO DPO prices of petroleum coke
Sector insights
How EY can help?
Auto Parts companies stretched their payables to offset reduction in

demand and inventory pile-up drove significant deterioration in C2C
days for Oil & Gas
Auto Parts
• Working capital across the Auto Parts sector

was severely impacted by drop in end customer
68 54% demand
49 46 50 46%
41 42 • However, a large number of businesses managed
33 27 their short term liquidity by stretching payables
considerably
C2C DSO DIO DPO
Oil & Gas
About the report

• 89% of O&G businesses suffered significant
increase in C2C days, mainly due to collapse of
Executive summary demand for crude oil, leading to crude & product
89% inventory pile-up
Need for a focus on working capital 48 11%
41
34 31
• Unlike other sectors, extending supplier
28 payments has not been possible as majority of
18 11 11
Working capital overview for India payments (e.g. for crude oil) are bound by global
contractual terms
C2C DSO DIO DPO
Sector insights
How EY can help?
Across the utilities sector, impact of reduced collections was offset

by stretching payables while project delays due to lockdown resulted
in a high C2C in EPC
Utilities
81 • While the household consumption of gas, power

64 66 and water increased during the lockdown,
54
38% billings and collections reduced considerably
62%
10 12 • In turn, majority of the Utilities sector (62%)
stretched supplier payments (e.g. to power
-2 companies) to fund short term liquidity needs
-5
C2C DSO DIO DPO
Engineering & EPC Services

189
About the report
161
• 60% of the companies in the sector experienced
Executive summary 117
101 increase in C2C due to delayed collections driven
100
88 60% by issues such as work stoppages, delays in
Need for a focus on working capital 40% claims settlement, agreement on extension of
27 29 time, inability to complete project milestones,
Working capital overview for India delay in arbitration awards etc.
C2C DSO DIO DPO

Sector insights
How EY can help?
About the report
4 How EY
can help?
Executive summary
Sector insights
How EY can help?

It is imperative for firms to have a structured approach to mitigate

working capital management issues, especially during the current
economic scenario
Scenario planning Set up “collection cells” Spend management

• Evaluation of impact on business plan • Dedicated cash management team to • Review direct / indirect expenditures
and re-forecast drive collections criticality, ability to defer or cancel
• Assess demand shifts / channel shifts • Review credit limits and credit periods • Identify opportunities for “stagger and
and adjust plan for customers with respect to revised delay”
• Identification of potential production sales plan and criticality of customer • Assessment of open orders to identify
shift to high-demand products • Consider use of early payment critical supplies
discounts, bill discounting • Vendor financial assessment to
• Assess customer liquidity flag potential risk of vendor’s non-
performance
About the report
Executive summary

Short-term cash flow forecast Governance and incentives
• Undertaking short and medium term • Define incentive mechanism and KPI’s,
cash forecasting under crisis scenario more inclined towards cash
Sector insights
• Centralize all decision making linked to • Introduce “collection reward
cash and burn rate monitoring programs” to incentivise timely
How EY can help?
• Implement daily/weekly rolling customer payments
forecast on a quarterly basis • Establish robust governance and
monitoring structure
Businesses are leveraging technology and data analytics to drive

business decisions and improve working capital management
Examples of emerging technology solutions
Rate and contract finalization

f Smart contracts
f Online negotiation tools
Source-to-contract
PO release and invoice processing
f Robotic process automation for invoice processing
Procure-to-pay f Vendor managed inventory
Manufacturing and asset maintenance

Manufacturing
f IO/OT convergence
About the report f Predictive asset and maintenance management
Warehouse
Executive summary
Depot norms
f Warehouse digital twin
Distributor f Automation and carton packaging and palletization
of products
Distributor delivery and stocking

Sector insights
f Direct to Retail with financing and last mile logistics
f Uberization of trucks
How EY can help?
f AI network optimization
EY’s working capital team can help identify, evaluate and prioritize
realizable process improvements to release significant cash tied up
in working capital
Illustrative initiatives
Agile supply chain: conduct robust sales and Supplier management: leverage “timely
operations planning combined with flexible supply payments” as a tool to develop better supplier
chain to meet dynamic demand requirements relationship and reduce sourcing costs
Customer engagement: facilitate greater Enhanced role of finance: move from a “transactional”
collaboration with customers, resulting in better approach to business partnering to help functions
payment terms and collection efficiencies manage trade-offs between cost and cash
ce s s
P ro
Analytics: use big data to enhance
Cash culture: embed a Cash Culture in
control through improved visibility
the organization across functions
and decision support
ople
Sy s
About the report Robotic Process Automation (RPA):
Organization structure: establish
Pe
m
te
use emerging technologies such
adequate role definitions and clearly
Executive summary as RPA for automating repetitive
defined RACI
transactional processing

Automation in supply chain: leverage Management focus: strike a balance
upcoming advances such as drone between competing priorities and
Working capital overview for India technology in warehousing and logistics appropriate incentives for “cash” focus
Sector insights Digitization: implement an end-to-end Governance: establish a robust

integration application to eliminate governance structure, metrics and
How EY can help? manual processes regular reporting
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All Tied Up

Working Capital Management

About the report 03

1. Need for a focus on working capital 05

2. Working capital overview for India 07

4. How EY can help? 19

• Companies in the financial and real estate

• The sample constitutes a total revenue of ₹62.4

2 pp* 6 days Automobiles Chemicals Cement &

India Inc observed a delayed collections

Large enterprises are able to effectively Sectors which experienced deterioration

About the report

Power Engineering & Oil & Gas Cash on

Need for a focus on working capital

Working capital overview for India

How EY can help?

Need for working capital optimization

Interest coverage trend Short term debt/sales trend

5.5 5.5 5.4

Working capital overview for India

Need for a focus on working capital

Working capital overview for India

How EY can help?

The pandemic caused significant challenges in managing working

C2C trend for India Inc

• There has been a steady improvement in overall

Need for a focus on working capital

Working capital overview for India

C2C DSO DIO DPO

India Inc balanced its working capital requirements during the

Breakup of working capital for India Inc

FY17 FY18 FY19 12 months LTM

Working capital performance as per size

Sector insights Large sized companies: FY20 revenue greater

Indian companies have significant opportunities to implement better

Working capital performance as per geography

• Compared to developed economies, Indian

How EY can help?

Need for a focus on working capital

Working capital overview for India

How EY can help?

Deterioration in C2C days was led by reduced collections for the

Working capital performance as per sector

12 Months 30-Sep-19 LTM 30-Sep-20

About the report

Auto OEMs extended payables to offset significant reduction in sales

Working capital performance as per sector

76 • Despite significant reduction in sales/ revenues

12 Months 30-Sep-19 LTM 30-Sep-20

About the report • c.53% experienced an improvement in C2C

A shift to online sales channels and digital investments by

Working capital performance as per sector

• Technology sector saw increased activity as

12 Months 30-Sep-19 LTM 30-Sep-20

Retail & Consumer Products

About the report

Inventory pile-up drove significant deterioration in C2C days for

Working capital performance as per sector

Metals & Mining

• 62% of Metals & Mining businesses experienced

12 Months 30-Sep-19 LTM 30-Sep-20

Cement & Building Products

About the report • Post lockdown government projects, rural/

Auto Parts companies stretched their payables to offset reduction in