How Havells India escaped its deathly cash trap in early 2000s

Cash is king. And yet, it is often sacrificed like a pawn in pursuit of growth. This is understandable. Rapid expansion comes at a cost. But sustainable businesses recognise that cash is too essential a bedrock, and that a cash squeeze requires fixing to stay afloat. Something that Havells India knows better than the rest. In this story, we look back on the time when the consumer electronics giant was struggling with a severe cash crunch and how it pulled itself out from the crisis, as recounted by CEO Anil Gupta Rai in his book 'Havells: The Untold Story of Qimat Rai Gupta.'

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The growth trap

In the late 90s and early 2000s, Havells was on an aggressive expansion spree. Their factory in Alwar grew from a modest five acres to a sprawling 100 acres. There was a streak of acquisitions. But, most of these investments were funded from internal accruals and debt. "Since we were not very profitable until 2002-03, there was always a sizeable debt on Havells's books," recounts Gupta in the book.

By 2005, the company had accumulated a net debt of Rs 166 crore with a debt to equity ratio of over two times, while its receivables averaged around 82 days between 1995-2005. Over this decade, its free cash flows were consistently negative.

As the company ramped up business, it sought alternative sources of capital and tried to build its equity base. But to no avail. Despite its popularity, potential investors undervalued the company, and the piling debt remained.

Meanwhile, a sharp question from an analyst named Shah heavily weighed on the company at the time: "Where is the 'color of money'?" Shah's question, which stemmed from Havells' decade-long negative cash flows and heavy debt-funded growth, was hard-hitting. "The analyst saw no efforts on our part to make it positive," Gupta recalls. It was a wake-up call that forced the company to re-evaluate its financial strategy.

The innovative fix

Fixing the cash crunch was easier said than done due to the nature of the business. While Havells had to pay suppliers upfront for raw materials, its buyers—dealers of wires and cables—demanded extended credit periods to make payments with a gap of some months. Any time there was a minor disruption from the buyers, the cash flows worsened. "It was a classical cash trap," writes Gupta.

The solution came from a groundbreaking partnership with HDFC Bank. Havells devised a unique system where the bank would immediately pay their raw material suppliers. Havells would repay HDFC within 90 days. "To de-risk HDFC Bank, we provided post-dated cheques for the amounts paid to the suppliers."

The arrangement allowed Havells to promptly pay its suppliers and establish solid relationships with them. "No vendor has had an issue in over a decade about his payments being delayed," Gupta remarks.

Further, to address payment delays from its buyers, Havells sold its sale invoices to the bank in exchange for immediate cash. These invoices, insured against non-payment, gave banks confidence and allowed Havells to turn cash-flow positive and eliminate working capital debt from the balance sheet. "Most of our balance sheet problems were solved because of this innovation," writes Gupta.

Freed from debt pressures, Havells could focus on what mattered most—growth. One significant benefit from the financial re-engineering was its ability to offer more generous credit terms to dealers, doubling the credit period from 45 to 90 days. This flexibility cemented Havells as a dealer-favourite. "The positive cash flow allowed us to spend more efficiently and maintain excellent relationships with suppliers", recounts Gupta.

Takeaway

Havells' journey from cash flow constraints to financial resilience is a powerful reminder of the importance of adaptability and strategic innovation in business. Adapting to financial challenges promises stability and sustained growth. In the case of Havells, its innovative approach led to business efficiency, which translated into better operational management and allowed it to seize growth opportunities without succumbing to debt woes.

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This article was originally published on October 08, 2024.