“The Problem of Plenty” for some Corporates . 

We reported last week that the market leader- Reliance has turned out to be a virtually ‘Debt-Free’ Company and we also said that it is a company to be watched for investment. Continuously the script is going up without any let up and today too. It was possible for Reliance to achieve this feat thanks to its strong Telecom arm- Jio-which has attracted the investors world over, vying with one another to be part of this Indian conglomerate in their Equity base, including the coveted Google.

But another point for discussion amongst the Investors and analysts has emerged. In fact it has turned out to be a paradox and a point of debate. The problem of plenty for some of the top companies. Yes, the problem is that they are now facing the ‘funds surplus’  as against the funds crunch sometime ago.

Companies like Bata India, Britannia, Colgate, Shree-Cement etc., are witnessing huge inflow of funds after the Covid ‘ 99 lull and they do not find good opportunities to deploy them effectively. Holding high cash by companies is usually frowned upon by shareholders, who’d rather any surplus be paid out as dividends, if not deployed in growing the business. That’s true in normal times. COVID-19 and lockdowns are unusual once-in-a-lifetime phenomena. And in these unusual times, cash is coveted. In fact, the resilience of a business and its future prospects weigh heavily on how long a company can hold out without significant cash inflows. When an analysis was made of  the new pattern evolving in some of the companies in the recent past, as a surprising trend has emerged. There are 11 companies most of them NBFCs in BSE -500 which hold cash or cash equivalents to meet their future 12 months’ operational expenses. Even big companies like Bata, Colgate, Britannia etc glow with funds which would perhaps reduce their debt obligation and the consequent debt-servicing costs and hence may improve their revenue and bottom line per se by reducing their cost of funds.

In view of these current circumstances, with their strong cash reserves and usually healthy free cash flows, such companies can leverage their liquidity in several ways to outdo their competitors and gain share. And at a time when cash is hard to come by, eking out more for every rupee invested in the business is easier. For those who use it well, it can translate to bigger gains when the economy recovers.

So, if you are hunting for safe havens in this market, considering companies with strong cash reserves may be worth the salt, though one could argue that many of them may not be particularly attractive on valuations.

So smart investors would do well to track these coveted companies for making a killing in short term and enjoy the bonanza!

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