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The Formal Sector Squeezing Suppliers Is Worrying, Says Centrum Broking's Nischal Maheshwari

This trend is especially visible in auto, cement, FMCG, consumer electricals and select pharma stocks, says Nischal Maheshwari.

<div class="paragraphs"><p>A worker uses a machine at an automobile spare parts workshop. (Photographer: Prashanth Vishwanathan/Bloomberg)</p></div>
A worker uses a machine at an automobile spare parts workshop. (Photographer: Prashanth Vishwanathan/Bloomberg)

Operating cash flows across sectors have improved in the last 10 years with the formal businesses squeezing smaller, informal suppliers, according to Nischal Maheshwari. But that has repercussions.

“Some improvement can be attributed to efficiency and technological advances but largely, it comes from credit periods going up,” the chief executive officer at Centrum Broking told BloombergQuint’s Niraj Shah in an interaction. “The formal sector is squeezing out the informal sector. This is dangerous, since these are the supply-chain guys you are depending on to continue operations.”

This trend is especially visible in automobiles, cement, fast-moving consumer goods, consumer electricals and select pharma stocks, said Maheshwari.

Centrum has released a report titled ‘The Blue Book’, an analysis of the past 10-year cash flows and returns for 105 stocks across sectors. The analysis has shown that bigger automobile companies are squeezing ancillaries, according to Maheshwari.

"In fast-moving electric goods, despite a lot of products coming in from China, companies have been able to maintain longer payment periods. The bigger they are, the better they are in squeezing out suppliers,” Maheshwari said. “This is what causes stress on the books of these micro, medium and small enterprises, and the banks which focus on small enterprises. It is a point of worry for me.”

Capex Recovery

Centrum, in the report, said capital expenditure has been on a recovery path since FY18 after plunging over FY14-17.

“For our sample set comprising 12 traditionally capex-intensive sectors, capital expenditure plummeted 17% from Rs 3 lakh crore in FY14 to Rs 2.5 lakh crore in FY16,” it said. The decline was prevalent in sectors such as cement, metals and mining, utilities, and oil and gas.

But starting FY17, there has been a “visible uptick” in capex in the cement, and metals and mining sectors, while it has remained muted in automobiles. “The auto components sector is seeing a surge in capex, led by tyre makers. Chemicals and telecom have seen a consistent rise in capital expenditure since FY14. By FY20, the total capital expenditure of the same sample of companies had recovered to Rs 3.6 lakh crore.”

Specialty Chemicals

According to Maheshwari, the specialty chemicals sector, too, has been doing well and is seeing healthy capital expenditure.

“Now, there’s a production-linked incentives scheme in the sector that will surely have beneficiaries,” he said. Besides, large global specialty chemical companies, such as Dow Chemical Co., are looking at outsourcing to India, especially after the Covid-19 pandemic, he said.

Other Key Takeaways

  • Return ratios have expanded for a handful of sectors. For others, they have just about maintained or hovered within their cyclical range.

  • Free cash flows have exhibited a fair amount of cyclicality but have remained positive for most sectors, leading to reduction in leverage.

  • The experience of Indian corporates with overseas acquisitions has been far from remunerative. This highlights that they were ill-prepared to operate in complex or unfamiliar regulatory and market environments.

  • Corporates in traditionally strong cash-generating sectors are in need of a better strategy on utilisation of their excess cash.

Watch the full interview here: