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Monday, 15 May 2023

Negative Cash Conversion Cycle and Negative Working Capital - vrk100 - 15May2023

Negative Cash Conversion Cycle and Negative Working Capital

(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

(Update 21May2026, with five screenshots, is available at the end of the blog)

There are several companies in India with negative cash conversion cycle (CCC or cash cycle for short). Cash conversion cycle is usually expressed in number of days. It indicates the ability of a commercial firm to convert its sales into cash more frequently.

The lower the cash cycle the better the efficiency of a firm, all else being equal. For example, the cash conversion cycle of Mrs Bectors Food Specialities Ltd, a food consumer company in India, is 44 days for the financial year 2021-22.

This is calculated by adding debtors days (28) to inventory days (54) and from the result subtracting the days payable (38) -- we get 44 days (= 28 + 54 - 38) as cash cycle. This means, the company is able to convert its sales to cash in cycles of 44 days. (for more on these terms, see weblink)

This company sells branded biscuits and bakery products, mostly to retail consumers. As such, it is able to get cash immediately for its sales resulting in a lower cash cycle.

Take another company, Chaman Lal Setia Exports, which has a CCC of 237 days for FY 2021-22. The nature of the business is such the company has to maintain high inventories, by buying rice from farmers and keeping it in warehouses -- thus increasing the working capital needs of the firm.

Its cash cycle 237 days is derived by: 68 (debtor days) + 184 (inventory days) - 15 (days payable).

Working capital indicates the ability of a firm to meet its cash needs for the day-to-day operations for the next 12 months. It is a measure of how liquid a firm is. The higher the working capital, the greater the finance cost for a firm.

Working capital and cash cycle are different, though they are inter-related. Working capital considers short-term borrowings of the firm; whereas, cash cycle ignores it.

In general, fast-moving consumer goods or FMCG companies in India have negative working capital. Due to higher efficiency of their supply chains; and unorganised suppliers, distributors and retail shops, the companies are able to postpone their payables and hold low inventories -- thus reducing their cash cycles.

The following is a representative list of Indian listed companies with low debt equity ratio and negative cash conversion cycle > data from Screener culled today >

As shown above, companies in FMCG, automotive, hospitals and cement sectors tend to have negative cash cycles signifying higher efficiency of the industries in particular and the companies in general.

Negative cash conversion cycle implies that a company is able to use stakeholders' money to run its day-to-day operations (more efficient working capital cycle).

When a company sells directly to consumers, such firms (like, FMCG, food, hospital services, etc.) get their cash immediately, but postponing their payments to suppliers -- resulting in negative CCC for the company.

On the other hand, when a company sells mostly to other big companies, such big companies delay payments -- hence, smaller companies tend to have longer cash cycles -- same is the case with companies dealing with government contracts as governments in general delay payments to contractors, etc.

Companies that hold leadership position in their respective industries are able to squeeze more out of their ancilliaries and suppliers, thereby enjoying negative cash cycles / working capital.

The following is a representative list of companies with high debt ratio having negative cash cycles >

To Sum Up

Cash conversion cycles differ from industry to industry and from company to company.

The lower the CCC (all else being equal), the better for the company -- meaning the company generates cash at faster intervals. The lower the cash cycle and working capital needs, the lower the finance cost for a firm.

Before making investments, an understanding of working capital cycles and cash conversion cycles of companies and their respective industries is a must.

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The following notes are added after the above blog was published on 15May2023 >

P.S. 21May2026:

Don't miss the related blog: Earnings Quality: Understanding Cash Conversion in Stock Analysis 11May2026

Screener.in screen for the following (login reqiured) > Negative working capital cycle > negative working capital or negative cash conversion cycle; with positive cash conversion ratio or operating cash flows (CFO) > (in future, the data for number of companies is likely to change depending on market cap changes and new annual results being declared)

!) First filter: Number of listed companies in India with market cap of more than Rs 2,000 crore as of 21May2026 are:

1,192

2) Second filter: Among the 1,192 companies, number of companies with negative working capital cycle or cash conversion cycle of less than zero are:

143

3) Third filter: Of the 143, number of companies with cash conversion ratio (CFO / net profit) of more than zero are (operating cash flow is positive in most cases):

118

Sector wise break-up of these 118 companies:

Our final list as o 21May2026:

Market cap filter of Rs 2,000 crore is used for total number of stocks in the sector:

> 19 companies in Healthcare services sector (hospitals and diagnostics), out of a total of 26 companies, with a minimum market cap of Rs 2,000 crore in this sector

Healthcare services is one of the strongest cash-generating sectors in India, with nearly three-fourths of listed hospitals and diagnostics companies exhibiting negative working capital alongside positive operating cash flows.

The sector’s high penetration of negative cash conversion cycles reflects strong pricing power, upfront cash collections and structurally superior cash-flow economics.

About 73% (19 companies out of 26) of listed healthcare services companies meet the criteria.

> 13 Leisure services (Hotels, QSR, Travel platform), out of 30

Leisure services, including hotels, QSR chains, and travel platforms, show structurally favorable cash-flow characteristics, with 13 of 30 companies (43% share) qualifying due to advance customer payments, asset-light operating models, and fast cash realization cycles.

> 9 automobiles (auto cars, auto two wheelers), out of 12

Automobiles stands out as one of the strongest cash-efficiency sectors in India, with 9 of 12 listed OEMs (75% share) exhibiting negative working capital alongside positive operating cash flows, reflecting strong dealer networks, rapid inventory turns and significant bargaining power over suppliers.

> 9 construction, out of 38

> 9 FMCG, out of 30

FMCG continues to demonstrate healthy working capital efficiency, though only the stronger franchises qualify (30% share) , indicating that superior cash conversion in the sector is increasingly concentrated among companies with dominant brands, distribution strength and pricing power.

> 9 auto ancilliary, out of 58

> 6 pharma, out of 76

> 5 power generation, out of 31

> 4 cement, out of 20

> 35 others, out of the rest

Insights from the above:

Only about 10% of large listed Indian companies combine negative working capital with positive operating cash flow, making it a rare structural advantage.

The highest concentration is seen in healthcare services, automobiles, and leisure businesses, where customer cash flows are received quickly while supplier payments are deferred.

These sectors benefit from strong pricing power, efficient inventory cycles, and superior bargaining leverage.

In contrast, capital-intensive and receivables-heavy sectors such as pharma, power, and cement show much weaker cash conversion characteristics.

The screen effectively identifies businesses where growth is increasingly funded by customers rather than external capital.

Five screenshots of some of the above 118 companies are attached here (all data as of 21May2026) >

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References:

Negative CCC / working capital screen (from Screener.in)

VR article 28Dec2022

VR article 18Jan2018

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Aspects of Shadow Banking System

Understanding Floating Rate Savings Bonds 2020 (Taxable)

Ipca Labs to Acquire Unichem Labs

Wipro Ltd Buyback Offer 2023

Short Notes on Bandhan Bank

Quarterly Data of Mutual Funds' Assets in India

JP Morgan Guide to Markets Mar2023

The Scourge of Negative Real Interest Rates Continues

BSE 500 vs S&P 500 Indices Compare 31Mar2023

Nifty 50 Index Quarterly Movement 31Mar2023

Mutual Fund Asset Class Returns 31Mar2023

Negative Impact of Debt Mutual Fund Tax Changes

Why Do Indian Equity Mutual Funds Always Disappoint Investors?

Weblinks and Investing

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.

CFA Charter credentials - CFA Member Profile

CFA Badge

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

Sunday, 7 May 2023

Aspects of Shadow Banking System - vrk100 - 07May2023

Aspects of Shadow Banking System

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Definition

-- Shadow banks are entities which are in the lending business; but they are not banks

-- banks are tightly regulated, but shadow banks are not subject to the same regulation as banks are subjected to

-- as they are not tightly regulated, there is a regulatory arbitrage for shadow banks

-- the term ‘shadow bank’ was coined by economist Paul McCully in a 2007 speech at Jackson Hole, Wyoming, USA

-- shadow banking system is defined by FSB as ‘credit intermediation involving entities and activities outside the regular banking system’

-- the Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system – it’s based in Basel, Switzerland

-- shadow banks are outside the banking regulation system performing the core banking function of credit intermediation (that is, taking money from savers and lending it to borrowers)

-- some financial market participants prefer to use the term ‘market-based finance’ instead of shadow banking

-- shadow banks play a key role in supplying credit and providing liquidity to the economy

-- non-bank financing is a critical alternative to bank funding and supports real economic activity

-- if the funding of shadow banks is based on short-term, shadow banks (similar to banks) can be vulnerable to “runs” during a crisis leading to a contagion risk

-- shadow banks do not have access to central bank liquidity or public sector credit guarantees

-- shadow banks do not have transparency on their assets and liabilities and as such they are called shadow banks

-- during the 2008 Global Financial Crisis (GFC), shadow banking system became a source of systemic risk, especially in the US and Europe

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Related Blogs:

What is Shadow Banking?

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Shadow Banks in India

-- in the Indian context: shadow banks are NBFCs or non-banking financial companies, insurance funds and mutual funds; but in recent years, NBFC regulation is tightened by Reserve Bank of India (RBI), removing some portion of the regulatory arbitrage enjoyed by NBFCs

-- strictly speaking, NBFCs in India cannot be termed as shadow banks in the sense of non-regulation because they have been in the regulatory ambit of Reserve Bank of India (RBI) since the mid-1960s

-- compared to the US, the Indian shadow banking system is smaller and less complex

-- there is inter-connectedness between banks and money market mutual funds (MMMFs)

-- in India, banks, NBFCs, mutual funds and insurance companies are inter-connected with a network effect of interaction

Shadow Banks in the US

-- in the US context: shadow banks are money market mutual funds, investment banks, structured finance vehicles, broker-dealers, non-bank finance companies, hedge funds, real estate funds, pension funds, and asset managers

-- some of the activities of US shadow banks include: money market mutual funds (MMMFs), structured finance, subprime residential mortgage-backed securities (RMBS), asset-backed securitisation (ABS), asset-backed commercial paper (ABCP) programmes, structured investment vehicles (SIVs), collateralised debt obligations (CDOs)

-- in the US, shadow banks don’t take deposits from the public, as such they are not as highly regulated as banks

-- After the 2008 GFC, shadow banking system is under greater scrutiny

-- in the US, shadow banks were brought into regulation in 2010 as per the Dodd Frank Act

-- because of regulatory arbitrage, shadow banks take higher risks; these higher risks may turn out to be systemic risk as happened during the 2008 GFC

-- in the US, the collective investment vehicles (like, money market mutual funds, fixed income funds, credit hedge funds and real estate funds) have grown fast and they now form a bigger part of the US shadow banking system

-- the role of ABCP, RMBS, SIVs and CDOs in the US shadow banking system has come down after the 2008 GFC

-- in the US, shadow banks earn higher returns from private credit

-- because of tighter regulations, banks in the US don’t participate in leveraged buyouts – creating opportunities for private equity firms, like, Carlyle

-- due to problems being faced by regional banks in the US, regional banks appetite for providing business loans may suffer – and this provides the opportunity for big investment firms, like, Blackstone, Apollo Global Management and Ares Management to fill the gap and provide loans to large, medium and small businesses

-- in the US, private credit business has grown very fast since the 2000s

-- financial markets are inter-connected globally; so are banks and shadow banks

-- shadow banks have close interlinkages with the banking sector on the assets and liabilities side

-- the growth of shadow banking industry in the US may pose systemic risk and financial stability risk once again in future

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References:

RBI speech 17Jun2014 on Role of NBFCs in Financial Sector

FSB Global Monitoring Report on Non-Bank Financial Intermediation 20Dec2022

----------------

Understanding Floating Rate Savings Bonds 2020 (Taxable)

Ipca Labs to Acquire Unichem Labs

Wipro Ltd Buyback Offer 2023

Short Notes on Bandhan Bank

Quarterly Data of Mutual Funds' Assets in India

JP Morgan Guide to Markets Mar2023

The Scourge of Negative Real Interest Rates Continues

BSE 500 vs S&P 500 Indices Compare 31Mar2023

Nifty 50 Index Quarterly Movement 31Mar2023

Mutual Fund Asset Class Returns 31Mar2023

Negative Impact of Debt Mutual Fund Tax Changes

Why Do Indian Equity Mutual Funds Always Disappoint Investors?

Weblinks and Investing

-------------------

Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

CFA Charter credentials - CFA Member Profile

CFA Badge

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

Friday, 5 May 2023

Understanding Floating Rate Savings Bonds, 2020 (Taxable) - vrk100 - 05May2023

Understanding Floating Rate Savings Bonds, 2020 (Taxable)

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(Effective Jul2024, all the fixed income products data are updated in new blog India Fixed Income Data Bank)

(updates 03Jan2024, 09Nov2023, 28Oct2023 and 27Jul2023 are available at the end of the blog)

(Floating Rate Savings Bonds, 2020 Taxable are not to be confused with Floating Rate Bonds or FRBs)

Government of India introduced Floating Rate Savings Bonds, 2020 (Taxable), or FRSB 2020 (T) for short, with effect from 01Jul2020. These bonds are issued by Reserve Bank of India, India's central bank, on behalf of the Government of India.

Salient Features of the bonds are:

The coupon / interest rates of these bonds are reset every half-year on January 1st and July 1st of every year. For example, as on 01Jan2023, the interest rate on 5-year National Savings Certificate (NSC) issued by Post Office is 7.00 percent.

Hence, the coupon rate on FRSB, 2020 bonds is set at 7.35 percent (7.00 + 0.35) for the half-yearly period, from 01Jan2023 to 30Jun2023, and the interest is payable on 01Jul2023 (full details in table 2 below).

Background

Prior to the introduction of FRSB 2020 (T), investors used to have the option of investing in fixed rate bonds, called 7.75% Savings Bonds (Taxable), 2018. These fixed rate bonds were abruptly withdrawn by Government of India effective 28May2020.

After withdrawing the above fixed rate 7.75% bonds, the Government of India introduced FRSB bonds effective 01Jul2020. The idea was Gov't of India did not want to pay fixed rate (which was higher at that time compared to market rates) and wanted to switch to floating rates, pegging them to market rates -- which were considerably lower in Jun2020.

This is a good thing as the FRSB bonds are supposed to be market-determined, provided the underlying NSC rate is changed as per market rates. As we've seen in the past, Government of India changes the Post Office savings rates capriciously and arbitrarily.

As such, the coupon rate on these FRSB 2020 (T) bonds is not market determined.

Coupon Rates since 01Jul2020 >

Suitability

As the interest income from the FRSB 2020 (T) bonds is fully taxable at the tax slab of the eligible investors (see table 1 above), these bonds may be suitable only to a limited set of individuals and others, who are high net worth individuals (HNIs) with investable assets above Rs 8 crore roughly.

Moreover, tax is deducted at source (TDS) on the half-yearly interest rate paid on these bonds on January 1st and July 1st of every year.

Investors have to consider the following factors before making any investment in these bonds:

1) better to consult your financial adviser before making any decision

2) investment goals -- whether you need regular income (the interest is paid half yearly, there is no cumulative option) and are these bonds in line with your investment needs

3) safety - these are issued by Government of India and as such they are 100 percent safe -- unless the government defaults which is very remote

4) convenience - these bonds are issued electronically; and are held by RBI in your Bond Ledger Account (BLA) -- you need to consider whether it is convenient for you to hold them in this form

5) taxability - you need to see whether the provisions of TDS and fully taxable nature of the bonds are in line with your tax options

6) tenure / liquidity -- the bonds will mature after seven years; you have to decide whether you're comfortable with locking * your funds for seven years; the bonds are not transferable and there is no secondary market for the bonds to sell them before maturity date.

(* the facility of premature encashment of bonds is available to the eligible investors after lock in period of 4, 5, and 6 years in the age bracket of 80 years and above, between 70 to 80 years and 60 to 70 years respectively -- of course, investors have to pay penalty charges for premature withdrawal)

7) rate of interest - is the rate of interest offered by the bonds attractive and are there any better alternatives suitable to your investment goals and objectives?

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P.S.: After writing the blog, the following updates are added with new information / images:

Update 03Jan2024: On 01Jan2024, RBI announced interest at 8.05 percent (remains unchanged from the previous half-year) for the half-yearly period from 01Jan2024 to 30Jun2024 on FRSB, 2020 (Taxable) >

Update 09Nov2023: Interest rates on FRSB 2020 (Taxable) are reset every half year and are linked to prevailing 5-year NSC interest rates. So, interest rates on FRSB can be quite volatile at times as happened during 1999 to 2003 period.

Interest rates on NSC fell from 12 percent in 1999 to 8 percent by 2003, as finance ministers Jaswant Singh and Yashwant Sinha, under Vajpayee government, dramatically reduced interest rates across the broad in the Indian economy (leading to economic revival after 2003).

Data from RBI's Handbook of Statistics on Indian Economy (HBIE) >

Update 28Oct2023: On 23Oct2023, RBI issued a press release allowing retail public to invest in FRSB, 2020 (Taxable) via RBI Retail Direct Portal. Currently, retail investors can invest in Central Government Securities, Treasury Bills, State Government Securities and Sovereign Gold Bonds via Retail Direct Portal. Now, the RBI Retail Direct Portal is broadened to FRSB or Floating Rate Savings Bonds, 2020 (Taxable) also.

RBI on 12Nov2021 announced activation of RBI Retail Direct Scheme. This was done to widen the reach of government securities (G-Secs) and other securities (like, Treasury Bills and state gov't bonds) to the retail public directly via Retail Direct Portal.

Update 27Jul2023: On 30Jun2023, RBI announced interest at 8.05 percent for the half-yearly period from 01Jul2023 to 31Dec2023 on FRSB, 2020 (Taxable) >

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References:

RBI press release 23Oct2023 - FRSB via RBI Retail Direct Portal

RBI FAQs on FRSB

RBI circular on FRSB dt 26Jun2020

RBI circular on features of FRSB 26Jun2020

RBI circular on FRSB operational guidelines 30Jun2020

Govt of India Notification on FRSB 26Jun2020

Govt of India Notification on sale of G-Secs 27Mar2018

Tweet 27Jun2020

Tweet 27Jun2020 on withdrawing 7.75% GOI Savings Bonds

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Ipca Labs to Acquire Unichem Labs

Wipro Ltd Buyback Offer 2023

Short Notes on Bandhan Bank

Quarterly Data of Mutual Funds' Assets in India

JP Morgan Guide to Markets Mar2023

Brief Analysis of RP Sanjiv Goenka and RPG Enterprises Groups

The Scourge of Negative Real Interest Rates Continues

BSE 500 vs S&P 500 Indices Compare 31Mar2023

Nifty 50 Index Quarterly Movement 31Mar2023

Mutual Fund Asset Class Returns 31Mar2023

Negative Impact of Debt Mutual Fund Tax Changes

When Is The Next Buyback Offer Likely To Be?

Why Do Indian Equity Mutual Funds Always Disappoint Investors?

Weblinks and Investing

-------------------

Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

CFA Charter credentials - CFA Member Profile

CFA Badge

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100