DETERMINANTS OF WORKING CAPITAL IN INDIAN REALTY SECTOR

Working capital is important aspect which ensures sufficient short-term capital to maintain the firm’s day-to-day operations and creating maximum value to the firm. As working capital may have a major impact on profitability, understanding the firm-specific determinants of working capital is important. This study was conducted on the firm-specific determinants of working capital in the Indian Realty Sector.  The independent variables employed in the study includes firm size, asset tangibility, leverage, profitability, sales growth, and fixed assets growth, while the dependent variables employed in the study are inventory, receivables, payables, and cash conversation days. The study based on the sample of thirteen companies of Indian Realty Sector, of which five were large-cap, five were mid-cap, and three are small-cap companies. The study was conducted for the period of 2011-20. The study employed fixed-effects panel regression to analyse the significance of the firm-specific determinants of working capital in the Indian Realty Sector.


INTRODUCTION
Working Capital has been very significant aspect of late as the major changes in the economy made the accessibility of the external finance difficult (PwC, 2012). The working capital is vital for the business organizations in these changing conditions, which helps in maintaining sound solvency and liquidity position. It can be said that better usage of working capital leads to encashment of competitive advantage in the market in the form of investments. The large body of research shows the importance of determinants of working capital management and the benefits of effective utilization of working capital. The identification of the significant determination of working capital is crucial process as these determinants vary with the sectors. For any business to start they need not only fixed assets but also the working capital. So, the firm needs to find out the adequate amount of working to carry out the routine activities of buying raw material, meeting up of day-to-day payments etc.
Significance of Working Capital. Business Solvency: The firm can maintain the solvency with the adequate working capital in the business with uninterrupted flow of production.
Goodwill: The timely payment of expenses such as tax and discount can be made with the adequate working capital which allows the firm to maintain the goodwill. fixed assets growth rate, while the dependent variables considered for the study include inventory days, receivables days, payables days, and cash conversation days. The sample includes thirteen companies of the Indian Realty Sector, of which five were large-cap, five were mid-cap, and three were small-cap companies. The study period was 2011-20. The study uses fixed-effects panel regression to analyse the significance of the firm-specific determinants of working capital in the Indian Realty Sector. The model is given by where the terms represent each of the determinants (firm size, asset tangibility, leverage, profitability, sales growth rate, and fixed assets growth rate, respectively), yt represents the dependent variables (viz. inventory days, receivables days, payables days, and cash conversation days), ui represents the ith firm fixed effect and vt represents the tth year fixed effect. There was considerable variation in the independent variables. firm size (logarithm of total assets) varied with a mean of 8.90 and standard deviation of 0.90. Asset tangibility varied with a mean of 14.38% and standard deviation of 17.26%. Debt-equity ratio varied with a mean of 0.94 and standard deviation of 0.54. Return on assets varied with a mean of 3.23% and standard deviation of 3.22%. Sales growth varied with a mean of 16.46% and standard deviation of 46.14%. Fixed assets growth varied with a mean of 21.59% and standard deviation of 87.12%. There was also considerable variation in the dependent variables. Inventory days varied with a mean of 1260 days and a standard deviation of 1667 days. Receivable days varied with a mean of 134 days and standard deviation of 173 days. Payable's days varied with a mean of 450 days and standard deviation of 1320 days. Finally, the cash conversion days varied with a mean of 943 days and a standard deviation of 1376 days.  There was found to be a significant difference in inventory days between the companies controlling for other variables, with DLF and HDC having significantly higher inventory days than Indiabulls, which in turn had significantly higher inventory days than Godrej, NCC, Phoenix, Prestige, Puravankara, Shobha and Brigade. There was also found to be a significant trend increase in inventory days across the research period, controlling for other variables. Also, controlling for differences between companies and years, there was found to be a significant negative size effect, a significant positive leverage effect, a significant negative return on assets effect with no other company-level variable having a significant impact on inventory days. There was found to be a significant difference in receivable days between the companies controlling for other variables, with DLF and Parsvanth having significantly higher receivable days than Indiabulls, which in turn has significantly higher receivable days than others except HDC. There was also found to be a significant trend increase in receivable days across the research period, controlling for other variables. In addition, controlling for differences between companies and years, there was found to be a significant negative size effect and a significant negative asset tangibility, a significant negative growth of sales and a significant negative growth of fixed assets effect, with no other company-level variable having a significant impact on receivable days. There was found to be a significant difference in payable days between the companies controlling for other variables, with Suntech Realty having significantly higher payable days than Indiabulls, which in turn had significantly higher payable days than other selected companies in the sector. There was also found to be no significant trend in payable days across the research period, controlling for other variables. In addition, controlling for differences between companies and years, there was found to be a significant negative size effect, a significant negative asset tangibility effect, a significant negative return on assets effect, and a significant negative growth of sales effect, with no other company-level variable having a significant impact on payables days.

CONCLUSIONS AND RECOMMENDATIONS
A significant negative size effect on inventory days shows that the large companies will keet the low level of inventories in proportion to change in sales. The large companies will make use of their supply chain network more efficiently than small ones. The negative size effect on receivable days shows that the large companies use their market power, which helps in lowering the terms of receivable. The negative size effect on cash conversion days, which shows that the large firms with the use of their market power and are able to hold the suppliers for long. This reduces the cash conversion days. The findings are on par with the studies Mongrut et al. (2014), Nazir and Afza (2009), Moss and Stein (1993), Chiou et al. (2006). There was found to be a significant positive effect of leverage on inventory days, which suggests that companies will maintain higher level of inventory with the use of high debt. Here, the firms do attract external finance for inventories with the view that they will be able to sell and make profits as and when they get orders. They can earn more than the interest cost. With respect to receivable and payable days there was found to be a significant positive effect of leverage indicating the companies having higher debt tend to have higher credit terms and the companies with high debt generally negotiates for payment terms with suppliers. This is due to the better access to the capital market, which in turn re-distributes the capital to the firm, which has poor access via commercial credit to get the competitive advantage (or foregone discounts). These results are consistent with the studies Nakamura and Palombini (2009), Niskanen and Niskanen (2006). The results shows a significant negative effect of return on assets on inventory, receivable, payable and cash conversion days. This suggests that the profitability is the key determinant of working capital in Indian Realty Sector. The firms with the high profits have sufficient cash to invest as a reason they are not concerned about the Working Capital. It was also found that the firm increases the value of shareholders by reducing receivable and increase creditors to improve the Working Capital position. The study goes with the Pecking Order Theory Myers and Majluf (1984), Fatimatuzzahra and Kusumastuti (2016) suggesting the inverse association between profitability and working capital.
There results also indicate a significant negative effect of growth of fixed assets on the receivable days highlights that companies with high growth tend to invest less in receivable. The pursuit of favorable extended credit policies may lead to higher sales while commitment to increase the sales needs more commitment in the receivables. It is in consistent with the Pecking Order Theory, which says higher growth level companies will prefer internal funds to finance the growth.