India Inc Cash Surplus: Strategy or Lack of Opportunity?

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Case Details:

Case Code : FINC072
Case Length : 11 pages
Period : 2007-2011
Pub. Date : 2011
Teaching Note : Not Available
Organization : Bajaj Auto Limited, Hindustan Unilever Limited, ITC Limited, Infosys Ltd., Reliance Industries Ltd., Tata Motors Ltd. and Wipro Ltd.
Industry : Various
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Only companies with large surpluses will take some risk and invest in equities. These long-term investors expect just 14-15% returns on equity investments. The total cash pile of BSE 500's Richie Rich has grown to Rs. 1,285 billion (bn) from Rs.1,100 billion (bn) 2010, excluding banks and NBFCs." ¹

- Ramkrishna Kashelkar, The Economic Times ², July 12, 2011.

On July 12, 2011, a popular business newspaper in India carried an article that showed that about hundred out of the five hundred companies of the BSE -500 had accumulated huge cash balances. The total cash balances accumulated by these companies amounted to 93% of market capitalization of the BSE-500 shares. The previous year, there had been 116 companies with huge cash balances. However, the cash holding increased by 17%³ from the year 2010. The companies which held huge cash balances included bigwigs like Tata Motors with Rs. 109479.3 million, Infosys with Rs. 150,900 million, and Reliance Industries with Rs. 301,390.3 million. The cash was invested in short-term instruments-

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

but the companies had a strong reason for keeping such cash pile. Rather than keeping the shareholders' cash idle or in liquid investments, the companies were planning their future strategy around the surplus excess cash. On the right strategy with the excess cash, Seshagiri Rao, CFO & joint MD of JSW Steel Group, commented, "The company keeps aside surplus cash as insurance for the future or invests the same in the business. Investments in business are better than any investing in any liquid asset."⁴

1] Ramkrishna Kashelkar, "Total Cash Pile of Bombay Stock Exchange's 500 Companies Like Bharat Heavy Electricals, Lakshmi Machine Works, Bharat Electronics and Others Rises 17%," www. economictimes.indiatimes.com, July 12, 2011.
2] The Economic Times is a leading business daily newspaper in India.
3] Ramkrishna Kashelkar, "Total Cash Pile of Bombay Stock Exchange's 500 Companies Like Bharat Heavy Electricals, Lakshmi Machine Works, Bharat Electronics and Others Rises 17%," www. economictimes.indiatimes.com, July 12, 2011.
4] Rupali Mukherjee and Partha Sinha, "Why RIL, Tata Motors, Hero Honda Need not Worry about RBI's Rate Hike,"www. economictimes.indiatimes.com, August 1, 2011.

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