Covid-19: Capital goods firms experiment with contracts, chase payments

Coping with Covid: Shorter credit-cycle deals, bank guarantees on pro-rata basis the new norm

Covid-19 and the ensuing lockdown might have slowed production of capital goods companies, but some firms managed to adapt and use the downtime to chase payments and enter shorter credit-cycle contracts. In addition, some clients are releasing bank guarantees earlier than usual, helping such firms.

R Shankar Raman, chief financial officer and whole-time director of Larsen & Toubro (L&T), said in the company’s June quarter earnings call that if there was a bright spot in the tough quarter, it was the company’s ability to reconcile payments, sign off and get these bills cleared. With time in hand to chase dues, the company has been very successful in making those collections.

And, L&T is not alone. Many witnessed robust cash flows in the previous quarter. “Cash flows are relatively better than last year. Clients, specifically the government, have been more effective in payments. Private clients, on a good footing, are also ensuring payments on time,” said a top executive of a capital goods company.

The executive pointed to a new trend, where some government and private companies are also releasing bank guarantees on a pro-rata basis and not waiting for the completion of the entire project. 

“Contractual obligations do not need them to release it on a pro-rata basis, but some of them are doing so out of either ‘benevolence’ or a pragmatic approach to keep the supply chain alive,” he said.

Others, like ABB India, have adapted to changing times with what T K Sridhar, the firm’s chief financial officer, calls the ‘cash-is-emperor’ approach.  

In addition to sharpening focus on collection, the company has spent the past few months identifying and prioritising customers and work where payments are quicker to come.

“Credit assessment becomes key here as we will need to prioritise our resources rather than investing in segments where one has to balance between changing circumstances and execution. My operations and production team is aligning to the new payment schedule,” said Sridhar.

New types of contracts are also being signed to keep up with changing circumstances.

Sridhar said in sectors like food and beverages, pharma, and railways, there is demand for faster capacity addition or replacement of existing capacities. He said ABB has been able to enter into new models with such customers. 

“If a cash-rich customer is willing to shrink the credit cycle by 30 days, in lieu of a quicker turnaround of project work and at a discount, it is a win-win for both parties,” he said.

Sridhar expects payments to be a mixed bag. He says payments from government clients are on time, as they operate on grants and other funds, where disbursements are monitored. He expects some pain for clients from the power and infrastructure segments, where cash flows depend on external factors like demand revival.

For most, government clients are now the safe option, both in terms of new orders and payments. The capital goods executive quoted earlier said, “Companies that have government undertakings as clients have seen better cash flows”. He also said public sector companies are also releasing last-mile (pending 10 per cent) payments for completed works faster than before to make more liquidity available to industries.

In an investor call for its June quarter earnings, L&T’s management also noted, “Surprisingly, due to ample liquidity in the system and the fact that both the central and the state governments have front-loaded their borrowing programmes for the year, our collections in the June quarter have been robust.”