It's not cash that is important but how it is used
In this issue:
» Country's biggest investor cuts down investment target
» India's loan growth to decline sharply by FY13
» Rising interest rates to boost small savings?
» IT industry headed for a slowdown?
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The answer to these questions is a bit complicated. The companies seem to be increasing their cash holdings but do not have any concrete plan to spend this cash as of now. In the past few months, India Inc has been on a cash raising spree. Public offers, private placements, strategic stake sales, the companies have done it all. And all of it towards one end. To raise the levels of cash on their books.
But the plans for using this cash have not yet been charted out. To understand why this is so we would need to divide the cash rich companies into 3 categories. The first category would consist of companies that have raised the cash for funding their capex plans. Companies in sectors like power and metals would fall into this category. Unfortunately, due to macroeconomic concerns, these companies have put their expansion plans on hold. As a result, the cash that was allocated towards these plans is just lying in the companies' accounts. Obliviously whenever conditions change, the cash would be utilized for the purpose that it has been committed to. When that would happen, is anybody's guess. As a result, investors would do well not to get attracted by the cash balances of these companies and instead concentrate on their business strength and valuations.
The second category of companies is those that are cash rich and plan to go shopping with it. These include companies in sectors like IT, pharma, etc. These companies are the ones that are using the depressed market valuations to scout for acquisition opportunities. These are the companies that investors need to be wary about. Wrongful or expensive acquisitions could actually kill the business rather than adding value to the company. At the same time, being overly conservative and not making any acquisition could lead to underutilization of the cash.
The third category of companies is those that just have the huge cash balances and nowhere to spend the same. These companies may look at rewarding their shareholders with the excess cash. Investors of such companies may see their income from dividends growing period on period. And this adds to the total returns that they receive on their investment.
So the bottom-line is how the company uses its cash. It can either employ increment amounts into its own business to generate higher returns. And if it is unable to do so, then to pay it back to the shareholders. Understanding how the cash would be used is important before making an investment decision.
What in your opinion is the best way for a company to utilize its cash balance? Share your comments with us or post your views on our Facebook page / Google+ page.
01:30 | Chart of the day | |
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Data source: Business Standard |
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This is because credit growth in a particular time period is determined by loans sanctioned earlier. In the current financial year, the disbursements for earlier loan sanctions are likely to lead to 16%-18% loan growth. However, poor investment climate, delay in the new project launches, rising interest rates and inflation is drying the pipeline for new sanctions that will lead to slow credit roll out next year. The loan growth next year is expected to hit seven year lows, lesser than the estimated growth of 16%-18% in advances this year. So how does this imply for Indian banks? While a lower credit deposit ratio may bring more liquidity to banks in the short run, if the trend continues, it will be negative for bank's earnings and keep the sector under pressure from rising deposit rates post deregulation of savings deposits.
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The company has started the current financial year with a cautious commentary on the company's prospects during the year. However, the management of the company is known for its conservative guidance and early disclosures of the facts. Therefore, all these warnings are being taken just as early cautions. But does it mean that the software sector would sink? Probably not!
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04:55 | Today's investing mantra |
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3 Responses to "It's not cash that is important but how it is used"
Muthuswamy Rajasekar
Nov 30, 2011Deploying surplus cash either in developing the current business or rewarding shareholders would be prudent. Wrong investment selection of company would derail the growth of the company. Visionary management would read the business climate correctly.
raju
Nov 30, 2011if a company has surplus cash and it is also efficient, then the cash rich company should try to acquire other companies.
Mashavankutty
Dec 1, 2011I Learned from the performance of Ril since more than two years the prise of share marginaly come down and number of shares spread among the shareholders every time brokers announce the target above 1000 to 11000 but it never reach in every day the sounder in the buyers side very high is a tact of the company or broker the maximum cash aquairing then all of sudden it will fall the same tentedcy is going
in the Nifty the investers geting wash out their hand.