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Cash is king... - Views on News from Equitymaster
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  • Dec 31, 2008

    Cash is king...

    India will grow at?
    We still have one more quarter to go before FY09 ends, but projections are already being made on India's GDP growth rate for FY09. As per a survey conducted by ASSOCHAM on 250 CEOs in the country, the Indian economy is likely to grow by 7.1% in FY09, lower than the growth achieved in FY08 of 9%, mainly due to the global economic meltdown and reduced demand on account of high interest costs. Not only that, these CEOs are of the opinion that growth could further slide to 6.5% in FY10 as the global economy worsens.

    As far as the manufacturing sector is concerned, the Centre for Monitoring Indian Economy (CMIE) has revised its forecast for industrial production growth in FY09 to 4.5% from 6.3%, citing the worsening global economy as the culprit once again. The early part of the year saw industrial production dipping sharply on account of soaring inflation and consequently higher interest rates. While inflation has come off its highs and interest rates are also softening, the weakness in the global environment is such that growth of the manufacturing sector is still expected to remain benign for the year.

    According to CMIE, high interest rates took its toll on the automobiles and consumer durables sectors. At the same time, the slowdown in the housing besides impacting construction and real estate companies have also hit cement, paints and other housing-related manufactured products. The machinery sector also reported a muted growth in the first half of FY09 because of the delays in execution of capex. While the signs of slowdown are there for all to see, India's growth is still the envy of the developed world, which has slipped into a recession fuelled by the worst financial crisis since the Great Depression.

    Which companies have the highest amount of cash?
    While the adage "Cash is king" is well known, during the heydays of the rising stock markets, this was forgotten somewhere along the line. And today when the economy is slowing down and liquidity is becoming a problem, the importance of cash has surfaced once again. Thus, in these times, which are the global companies which hold the distinction of having the highest level of cash? As per reports in FT, twenty of the largest listed companies in the world are sitting on a combined cash pile of US$ 570 bn. In these times when everybody is struggling to find cash, those that are sitting on huge piles are expected to weather the storm better.

    The list of companies with the highest levels of cash is led by four financial institutions with Warren Buffett's Berkshire Hathaway at the top with US$ 106 bn in net cash. Interestingly, the next three slots are filled by Chinese banks with Bank of China, ICBC and China Construction Bank having US$ 101 bn, US$ 89 bn and US$ 82 bn in cash respectively. Of course the next question that everybody is asking is how can this cash be utilized? While some may use this as an opportunity to go in for acquisitions given the attractive valuations, others may simply opt for higher dividends or share buybacks.

    The importance of cash is relevant in the Indian context too. Those Indian companies with high levels of debt are in for some tough times as rising interest costs will stifle profits. And the risk becomes even bigger if much of the debt is foreign currency denominated and unhedged, thereby magnifying the possibility of forex losses.



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