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Friday, April 03, 2020

Holding their breath: Indian firms in an interruption of revenue

by Renuka Sane and Anjali Sharma

India is in a state of lockdown with only essential goods and services getting exemption. This has given a teachable moment on the role of liquid cash in corporate financial policy.

Most firms will see a varying degree of a revenue shock. Expenses such as salaries, rents and interest on debt will continue to be incurred in order to survive. In this article we ask: How many days of liquidity cover is there, in the large non-financial firms, to be able to meet a certain threshold of minimum expenses in the absence of any revenue?


We extract data for all non-financial firms from the CMIE ProwessDX database, updated in December 2019, for three years: 2016-17, 2017-18 and 2018-19. Data on 2018-19 is not yet available for a large proportion of the firms. For most firms, therefore, we rely on the two older years of data.

We drop firms that report negative assets, negative income and negative sales. This yields a sample of 16,300 firms which are observed in the first two, and possibly in the third, year. For each of these firms we extract information from the database on: (1) identity variables such as age, industry, listing status and ownership, (2) income and expenses from the profit and loss statement, and (3) liquid assets i.e. cash and bank balance and marketable securities from the balance sheet.

We do not know the state of the firm in March 2020, when the lockdown came. We estimate the state of the firm using the mean of two or three years seen in the data (depending on data availability). The recent three years have been a period of stability of the nominal values, i.e. low growth, thus making these simple averages more useful.


We make four admittedly extreme assumptions:

  1. A 100% sales shock for all non-financial firms. This is an extreme scenario. Most firms will face some degree of sales decline which may vary by the sector the firm is in. However, our assumption gives us a worst case picture for the hurdle that cash holdings will have to overcome.

  2. Liquid assets only include cash and marketable securities. We do not include loans from the banking sector or receivables for the following reasons:

    • Indian firms are generally credit constrained. In the months prior to the lockdown, banks and non-bank finance companies (NBFCs), which are the mainstay of lending in the economy, were already under considerable stress. Their overall lending, and especially their lending to firms had stagnated, with negative consequences for liquidity in the credit markets. Looking forward, many firms will find it difficult to obtain debt capital, given the difficulties of the financial system. Hence, it's useful to analyse how liquid assets -- alone -- may carry some firms across the shock.

    • Our rationale for not including receivables is the suddenness of the lockdown. If firms had any notice that a lockdown was imminent, they would have made efforts to accelerate their receivables collection. But since the lockdown was announced and put in force with no notice, we assume that firms were not able to engage in this strategy.

  3. A 50% realisation of the value of marketable securities in the book. Market conditions are also affected by the lockdown; the price and impact cost of marketable securities has deteriorated. The vast majority of liquid assets is cash, therefore the results are not very sensitive to this assumption.

  4. The core expenses required to stay alive. We define the core expenses as: (1) salaries for employees and outsourced staff, (2) rentals, (3) utility costs, (4) other costs such as IT and communication expenses, insurance premiums and auditors fees, and (5) interest costs on debt.
    All firms are looking at ways to reduce the wage expenditure, by cutting wages and headcounts [example]. Our calculation deals with the outer extreme: a firm that makes no adjustment to its wage expenditure.
    Similarly, some firms may be able to contractually avoid paying rentals expenses using the force majeure clause, which also entails legal risk. We assume there are no gains on this score.
    For costs such as utilities and repair and maintenance we assume the expenditure will be 60% of the regular expenses, as these expenses will be lower in the absence of regular operations.
    On interest expenses, individual banks may choose to provide relief in terms of a moratorium on interest payment after the RBI circular on the same. But since this is still a decision that banks have to take, it is useful to understand the ability of firms to cover these expenses using their liquid assets. We do two cases: including and excluding interest costs.


We compute the following variables:
  • Liquid assets (LA) = Cash and bank balance + (Marketable securities)*0.5. Liquid assets are 5% of firms' total assets in India, and cash and bank balance accounts for 99.3% of total liquid assets.
  • Minimum Costs 1 (MC1) = Employee salaries, PF and gratuity + Outsourced staff cost + (Power and water charges)*0.6 + (Repair and maintenance)*0.6 + Lease and rentals + IT and communication costs + Insurance premiums + Auditors fees + Rates and taxes + Financial services expenses including interest cost. In the dataset, the share of these elements is as follows:

    • Employee salaries: 43%
    • Outsourced staff: 12%
    • Interest cost: 20%
    • Financial service expenses: 4%
    • Rest of the expenses: 22%

    MC1 is 21% of firms' overall cash expenses excluding direct taxes (cash expenses exclude non-cash items such as depreciation and provisions).
  • Minimum Costs 2 (MC2) = MC1 - Interest costs. MC2 is 80% of MC1.
  • R1: days cover of liquid assets assuming the cost is MC1 = (LA*365)/MC1
  • R2: days cover of liquid assets assuming the cost is MC2 = (LA*365)/MC2


Figure 1: The fraction of firms that cannot hold their breath for a given number of days

Figure 1 shows the fraction of firms where the liquid assets are not able to pay for a given number of days of zero revenue, going by two definitions of minimum cost (i.e. including or excluding interest payments).

We see that 2.7% of the firms do not have liquid assets to meet MC1 for even 1 day. There are 29.8% (4,870 firms) that have 30 days or less of liquidity cover for MC1 and 54.8% (8,927 firms) that have 90 days or less of liquidity cover for MC1. These firms will be the ones most affected by the current lockdown and any future extension to it.

If we put interest expenses aside, thus assuming that all firms are able to obtain an interest payment moratorium, the results change slightly. Now, 2.3% of firms do not have liquid assets to meet MC2 even for 1 day. Now, 23.4% (3,799 firms) have 30 days or less of liquidity cover for MC2 and 47.5% (7,674 firms) have 90 days or less of liquidity cover for MC2.

Who are the firms who are vulnerable on account of low cash holdings?

Our sample of 16,300 firms has an asset base of around Rs. 164 trillion and annual sales of Rs. 107 trillion. The 8,927 firms which we identify as vulnerable (3 months or less of liquid assets for MC1) account for nearly 60% of the overall sales and total assets.

Around 19% of these are large firms (assets > Rs.5 billion), 27% are medium sized firms (assets between Rs.1 billion and Rs.5 billion) and 53% are small firms (assets less than Rs.1 billion). While the large firms may be able to solve their liquidity challenges by accessing credit, the medium and small sized firms will find it harder, given the weaknesses of the financial system.

Around 2,300 of these are listed firms, which is nearly half of all the listed firms in the country.

About 79% of these firms are old firms, that is they have been in existence for more than 10 years.

These firms are spread across many industries: manufacturing (43%), services (28%), trading (14%) and construction and infrastructure (8%).


Our calculation is admittedly based on extreme assumptions: Zero decline in wage expenditure, zero access to fresh credit, and zero revenues for a certain number of days. More than half of the Indian corporate non-financial balance sheet is unable to hold its breath for 90 days, under these assumptions. About a quarter of the firms will not be able to handle a 30 day interruption of revenues. This highlights the incompatibility of a zero decline in wage expenditure with a sustained period of zero revenue and no fresh borrowing.

The authors are with NIPFP and Finance Research Group respectively. Views are personal. We thank Josh Felman, Radhika Pandey, Ajay Shah, Pramod Sinha, and Harsh Vardhan for useful comments.


  1. Can you attach the listed firms who are in above mentioned vulnerable category?

    1. wise question :) some of such listed large caps could be good shorts; or else portfolio realignment and shedding the vulnerable cos.!!


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