Problem of plenty for Indian companies as cash pile keeps growing

New investments haven't kept pace with money flowing in from operations

RJR Nabisco, the American tobacco and food giant whose takeover spawned the classic Barbarians at the Gate reportage book, once had so much surplus cash that it spent it on a fleet of 10 corporate jets, lavish executive perks and even contemplated spending $10 million on a robot to replace a single forklift operator in its bakery business. The strong cash flow, with apparently limited avenues for profitable deployment, was one of the attractions that triggered its leveraged buyout in the 1980s.

Recent reports have pointed at large cash balances at some of the world’s biggest firms. Alphabet, Google’s holding company, is sitting on $118 billion of cash, and Berkshire Hathaway on a record $147 billion, say reports underscoring the lack of opportunities to put money to work.

A look at Indian companies shows a surge in the amount of cash they generated in the last financial year (FY23), compared to the period before Covid-19. Companies generated 73 per cent more cash from operations in FY23 than in 2018-19, shows an analysis of 302 S&P BSE 500 firms with comparable data across recent years. Cash flow for investments such as building new factories was up only 25 per cent as seen in chart 1 (click image for interactive link).

This has meant that the amount of cash with companies has gone up by more 70 per cent. It is over Rs 6.2 trillion for the companies under consideration in FY23.

A large part of the increased cash generation comes from oil companies. Refineries generated Rs 80,000 crore more in operating cash flows in FY23 compared to FY19. Other oil companies added Rs 30,000 crore. Power generation and distribution companies saw their operating cash flow rise from Rs 0.7 trillion to Rs 1.2 trillion in the same period. It was up from Rs 0.7 to Rs 1 trillion for information technology companies (chart 2).

The value of private sector projects under implementation has grown, shows data from the Centre for Monitoring Indian Economy (CMIE). But it is less than government spending, unlike a decade ago (chart 3).

This is because around a quarter of manufacturing sector production capacity is unutilised, shows Reserve Bank of India data. Some of the increased cash generation is translating into more money being returned to shareholders, such as through the Rs 10,000 crore buyback at Larsen and Toubro and record dividend payouts.

Nabisco’s takeover marked a period of frenzied deal-making and corner office volatility in the 1980s. What follows in Indian companies remains to be seen.