Capital goods entities’ working capital requirement at 5-year high

A study of 50 capital goods makers in the equipment manufacturing and construction segment indicates that the sector's credit quality has come under strain, with working capital requirements surging to a five-year high.

According to the CRISIL study, tight liquidity in this sector is primarily due to large capital investment plans being deferred since 2011-12 by several end-users, leading to inventory stockpiles and delay in release of payments.

The weakening credit risk profile of these entities assumes importance as the capital goods sector acts as a lead indicator, signalling increased pressure on other sectors as well as the overall economy, the study points out.

''Project deferment by customers resulted in a 15-per cent decline in order inflow for capital goods entities in 2011-12 over the previous year," says Nagarajan Narasimhan, senior director, CRISIL Ratings.

According to Narasimhan the reasons for deferment in projects include demand slowdown, increase in project costs and interest rates, and lower cash flows.

"In addition, working capital requirements have increased substantially; the gross current asset (GCA) days of a sample of 50 listed mid-sized players have increased to 370 as on 31 March 2012, from 280 as on 31 March 31, 2009, the highest in the past five years,''  he adds.