Service providers feel the pain as India Inc faces working capital squeeze

The country’s largest corporations are hitting the brakes on payments to be made to service providers such as consulting and law firms amid a liquidity crunch, say senior executives in India Inc. A founding partner at a leading corporate law firm said, “There is a delay of between two and four months above what the normal billing cycle for receivables used to be. The trend extends to some of our top corporations in the country.” 

The delay, the lawyer said, was a manifestation of pushing service providers lower down the list of priorities. “The thought process seems to be that service companies don't have the exigencies that, say, manufacturing companies do with inventory and stockpiles of goods and what not. But the reality is law firms have huge input costs in terms of salaries and wages.”

That’s not all. Law firms are also starting to suspend work, and in extreme cases taking action under the Insolvency and Bankruptcy Code (IBC) in order to recover dues. “We have started asking for advances and winding up cases for the recovery of large dues,” the lawyer added.

A managing partner with a mid-sized law firm said it was not just domestic corporations but even large multinationals were delaying by as much as two months on outgoings. 

The practice is also visible in manufacturing. A promoter of a component-manufacturing firm said one of India’s largest automotive companies was asking its suppliers to go for bill discounting with a high rate of interest (much higher than what suppliers were charged by their bank), which was effectively a way to get a price reduction. 

The CEO of a private equity major said the common refrain was that “in boom times or recession, lawyers, accountants, and consultants always have steady business. While those categories do have business, payments are likely to be getting delayed because of the overall tightening of credit in the financial markets”.

Naveen Tiwari, partner and leader for EY’s Working Capital Advisory, said while the data for the current financial year would be available in a few months, there was every indication that liquidity had come under increased pressure. 

“From the slowdown at NBFCs to the tightening at PSU banks, the access to working capital for a number of corporates has reduced and that has a trickle-down effect,” he said, adding that bank credit growth as of November 2019 was at 8 per cent versus over 15 per cent in November 2018. Several sectors are facing these challenges, especially with receivables, including some of the EPC and engineering services companies, Tiwari added. As a result, one side-effect of the working capital squeeze is that private equity has stepped in to become the available provider of growth capital with entrepreneurs being left with no choice but to give up equity in exchange for funds.  

In a spot
 

• Law firms, SMEs seeing payment delay of three to six months

• OEMs asking vendors to discount bills 

• Bank credit slowdown, NBFC woes lead to chain reaction

• Cases such as DHFL and Cox & Kings causing trust deficit

According to a Crisil report for the fiscal year 2020, there has been slower-than-expected economic growth, slippage in demand growth across sectors, and a consequent elongation of working capital cycles, leading to industries such as the construction material sector, including heavy machinery, seeing more downgrades because of stretched working capital cycles. 

Non-banking financial companies (NBFCs) and housing finance companies (HFCs) together have been the major source of funding for the real estate sector, the report said, adding that independent power producers also witnessed higher downgrades because of delays in realisation from distribution companies, which impacted their liquidity and financial risk profile. 

Pramoud Rao, managing director of security services company Zicom, said his payments had been held up for six months. 

“It’s a typical recessionary trend that we see during slowdowns and what compounds it is when companies such as DHFL and Cox & Kings and Talwalkars gyms stop business overnight. That is leading to a deficit in trust and confidence and then people halt payments. So while it’s not a welcome trend, we hope it will pass soon.”