5 Large Cap Companies with Efficient Working Capital Management

When selecting stocks for investments, an essential factor to consider is the company’s efficiency in working capital management, because it suggests the strength of the company’s business.

Before checking the top 5 companies with efficient working capital management, let us check why is it essential to consider Net Working Capital while selecting stocks?

Take the example of a garment manufacturer, “ABC Limited” which procures its raw material – Cotton, from farmers directly and produces the final product (Garments) in 2 weeks and sells through the distribution channel of ABC Limited.

Creditor Days: ABC LTD has to pay for raw materials after one month of making a purchase. Here, the 1 month time ABC Limited takes to pay its creditors (farmers) is called ‘Creditor days’.

The two weeks time taken to manufacture the product and sell it to distributors is called Inventory Days.

Now assume, ABC Limited has a great reputation in the market and distributors want the products as and when they are available, they are also prompt in making payments and takes only a week for ABC to realize their payment. This one-week period is called the ‘Debtor Days Period’.

As we see in this example how ABC, on one hand, pays its Creditors only after 30 days, takes less than 14 days to manufacture, and realizes its entire sale proceed in less than 7 days is able to manage its working capital efficiently. ABC is an example of how a strong relationship with creditors and debtors could bring scale in business.

What is the advantage?

As per the above illustration, when the debtor days are lower than the creditor days and inventory is moving faster, ABC could easily pay its creditors with the cash flow coming from the debtors. Thus, the suppliers are paid on time and gives the raw material for credit again, customers get stock on time in the next cycle, resulting in a smooth flow of company operations.

Investing in companies with this kind of operational efficiency is always proven to be profitable. In search of such companies with a solid market positioning and strong negotiation power, we are presenting 5 Large-cap stocks with a low cash-conversion cycle.

1. Reliance Industries Limited (RIL):

RIL not only helped its investors in bagging a CAGR of 32.34% for the last 5 years and 24.49% for the last 3 years, but also showed its skill in efficiently managing its working capital requirements. The below table shows the debtor days, inventory days, creditor days, and 3 – year returns given by Reliance LTD.

2. Asian Paints Limited (ASPL):

ASPL has shown its effectiveness in managing its working capital requirements along with its share price growth of 27.03% and 26.54% in the last 5 and 3 years, respectively.

The below table shows the debtor days, inventory days, creditor days, and 3 year returns given by Asian Paints Limited.

3. Larsen & Toubro (L&T):

Regardless of the range of its businesses, L&T has successfully and efficiently managed its working capital requirements for the last five years. Though the share price growth has been low at 7.83% for the last 3-years, we believe L&T will benefit from schemes initiated by the Government of India in the infrastructure segment.

4. Avenue Supermarts Limited (AVSL):

AVSL, operating under the brand name DMart Stores, is one of the largest supermarket chains in India, with a market capitalization of Rs.2,64,699 Crore has about 270 stores in 11 states of India. Under the leadership of Mr. Radhakishan Damani, the company has gifted its investor with a share price growth of 44.96% for the last 5 years & 39.84% CAGR for the previous 3 years.

AVSL, with its strong market position in the organized retail segment, had shown its working capital management skills with a low cash conversion cycle of 30 days.

5. UltraTech Cement Limited (UTCL):

UTCL is the largest cement manufacturer in India and 3rd largest in the world, with an installed capacity of 120 MTPA. The company has about 50 manufacturing plants with a very low business concentration across India.

We believe Ultratech Cement will benefit from schemes initiated by the Government of India in the real estate and infrastructure segment. UTCL has given its investors a return of 18% CAGR for the last 3 years, along with effective working capital management

Although Working capital management is an important factor when considering an investment in stocks, it should be combined with other factors based on investors’ risk appetite.

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