Cash reserves at automobile firms touch seven-year high


Cash reserves at automobile companies rose in 2015-16 to the highest levels since 2009-10 on good operational performance, cheaper raw materials and deferred investment plans.

Cash reserves and investments at Ashok Leyland Ltd, Maruti Suzuki India Ltd, Bajaj Auto Ltd, TVS Motor Co. Ltd and Mahindra and Mahindra Ltd rose to the highest in absolute terms in seven years in the year that ended in 2015-16, according to numbers from corporate database provider Capitaline.

With most companies excluding Maruti having enough capacity to see them through the next two to three years, “companies are unlikely to deploy cash in creating greenfield capacities and would instead use it for strengthening research and development capabilities and new model introduction”, said Ravi Shenoy, vice-president of mid-caps research at brokerage Motilal Oswal Securities.

“A spate of new regulations on emission, fuel efficiency and safety will necessitate a higher expense,” said Shenoy.

Intense competition among car and two-wheeler makers will also lead to higher advertising, marketing and brand-building expenses, he added.

According to Mahantesh Sabarad, deputy head of research at SBI Cap Securities, given that a lot of the existing production capacity remains unutilized, there has not been any major expansion at most automobile companies since 2010.

“We have seen that most companies have not made any substantial investments to consume the cash they have been generating in the form of capex,” Sabarad said.

The two plants that came up in 2010 were Tata Motors’s Sanand plant in Gujarat and Mahindra’s plant at Chakan near Pune. In 2014, Hero MotoCorp opened a new factory at Neemrana in Rajasthan.

Besides cash carried over from previous years, sharply cheaper raw materials also helped increase the buffer.

Since 2009-10, the prices of aluminium, steel and rubber in the international markets have fallen 34.13%, 43.6% and 48.38%, respectively, thanks to the end of the commodity super cycle and an economic slowdown in China.

Given that around Rs.7 out of Rs.10 earned by an auto company is spent on buying raw materials, the fall in prices more than made up for the weak growth in volumes and boosted earnings.

Bus and truck maker Ashok Leyland saw the biggest growth in its cash pile. Cash and investments at the Hinduja Group flagship firm rose four times to Rs.3,485 crore in 2015-16 fromRs.845.08 crore in 2009-10. In the year that ended in March, its net sales advanced 39.5% to Rs.18,577 crore, while net profit more than doubled to Rs.721 crore from Rs.334 crore a year ago.

“It (Ashok Leyland) has been a remarkable turnaround story—from being a debt-ridden company, it has swung into a cash-rich one,” said an analyst at a domestic brokerage who did not wish to be identified.

Utility vehicle and tractor market leader Mahindra and Mahindra too saw its cash and investments in 2015-15 almost double to Rs.15,817 crore from Rs.8,141.25 crore in 2009-10. This, despite a rather muted earnings in 2015-16 when net sales increased 10% to Rs.69,785.97 crore and net profit rose 2.2% toRs.3,211.26 crore from a year ago.

V.S. Parthasarathy, group chief financial officer at Mahindra and Mahindra, attributed the cash pile “to better planning and execution and an overall excellent cash-flow management”.

“Even with a tough FY16, we managed to increase our cash reserves after repaying some of our debt during the year,” he said.

Cash reserves in the balance sheet ensure the health of the company by helping it meet any exigencies and keep the business running smoothly, he said.

“They also act as a growth driver and are my ready armour to leverage any opportunities which may come up in future. For surplus funds investment, we follow the SLR principle—safety, liquidity and return, in that order,” Parthasarathy pointed out.

Car market leader Maruti Suzuki saw cash and investments more than double to Rs.17,824.8 crore in 2015-16 from Rs.7,274.8 crore in 2009-10 on the back of strong volumes and earnings growth. Maruti’s net sales in the year that ended in March rose 23% to Rs.4,698 crore from the year-ago period.

Analysts expect Maruti’s cash reserves to remain at elevated levels as most of its planned capacity expansion will be done by its parent Suzuki Motor Co. They expect Maruti to invest in strengthening its reach and brand.

At two- and three-wheeler maker Bajaj Auto, cash and reserves advanced to Rs.10,372 crore in 2015-16 from Rs.4,122.93 crore in 2009-10, following a good year of operations. Net sales rose 5.43% to Rs.22,252.78 crore in the year ended March from a year ago, while net profit rose 25% to Rs.3,783.93 crore