In such a situation, stocks with piles of cash can provide significant comfort. Liquid holdings offer downside protection. When a stock declines sharply, the market starts recognizing the cash on the balance sheet. Cash on the balance sheet belongs to the shareholders in proposition to their equity holdings.

Cash is not profit. But it is a significant component of investment decisions. For businesses that have just commenced operations or through with their mega expansion, cash becomes more important than profit. Cash is required for the smooth-running of the organization.

Cash can be generated by operations, investment and financing. Cash from operations is critical as it reveals the strength of the company in the market place. Those earning a good quantum of cash from their core activity are good medium- to long-term investment opportunities.

Here, ratios such as free cash-flow to profit after tax and free cash-flows to earnings before interest tax depreciation and amortization (Ebitda) or operating profit (OP) ratio are used as yardsticks. Free cash-flow represents cash generated after cash outflows to run the business and maintain fixed assets. Companies that have sufficient capacities can take care of demand for their goods and services for several years. They need to spend only on maintenance, generally a small portion of gross or net fixed assets. Most of the cash is available to pay dividends or for growth plans without resorting to much debt going ahead.

How cash is being deployed is crucial. Ideally, cash should be ploughed back to grow revenues and profit by undertaking green- or brown-field expansion to consolidate, gain market share or diversify into new areas. It can be deployed to strengthen supply chains and the distribution network. If there are no opportunities in sight, cash is returned to the shareholders through buyback and dividends including special and interim dividends.

Too much cash has downsides. It lowers ratios such as return on equity (RoE) or return on shareholders' fund. RoE is one of the prime benchmarks used by minority shareholders to measure performance. Many companies opt for buyback to distribute the cash to the shareholders. Berkshire Hathaway, majorly owned by Warren Buffet, is known to frequently purchase back its own shares. It mopped up shares worth US$ 928 million in the calendar year (CY) 2018. Similarly, several cash-rich Indian companies, too, have completed buybacks in the recent past (see box: Mode of deployment). Buyback reduces the number of equity shares outstanding in the market. As a result, the earning per share (EPS) goes up. The easing of valuation, in turn, attracts new investors.

Many companies prefer to show net debt. The approach is flawed. It is not appropriate to deduct the entire cash on hand from debt or market capitalization. Businesses need liquidity for routine functions. The requirement of cash by seasonal industries is higher compared with those whose revenues can be annualized.

Investors have to rely on disclosures made by companies to get insights into the quantum of cash and liquid investments. Debt fund mutual funds are the preferred vehicles to park excess cash. Equity investments carry higher risks and are usually avoided.

Comparing cash with market capitalization is a good starting point to shortlist companies. Suppose a company has market cap of Rs 20000 crore and cash and cash equivalent of Rs 2000 crore. If there is no debt, the company is available at Rs 18000 crore. With no borrowings, the cost of investment down is to the extent of cash in hand.

Other parameters taken into account were industry and company outlook. Ideally, a company should be part of a growing industry with bright prospects. The demand and supply equation should be favorable apart from government regulations and policies. Companies should have a reasonably high market share in their industries.

Company-specific attributes such as growth prospects, brands, marketing and distribution network, technology, product portfolio, profitability, future plans and the quality of promoters and management are also critical. The track record of rewarding shareholders has to be assessed.

Capital Market examined small caps having market value below Rs 2000 crore and mid caps between Rs 2000 crore and Rs 15000 crore, with cash on their balance sheets. Debt-free companies were selected. Debt was at the net level, that is, minus cash and liquid investment. Cash mainly comprised bank balance, fixed deposits and investments in debt mutual funds. Cash per share was compared with the current market price.

Companies to have paid dividends in the latest financial year were considered. Dividends assure investors that cash disclosed in the balance sheet is real. Those with mutual funds presence were picked to ensure a track record of good governance.

Dr Lal Pathlabs is debt-free, with cash, fixed deposits and liquid investments of Rs 653.7 crore end December 2018. Ebitda grew 13.7% to Rs 227.4 crore in the nine months ended December 2018 over a year ago. Around 31.2 million samples, collected from 13.3 patients, were processed in the period. A nationwide network offers patients and healthcare providers a broad range of diagnostic and related tests and services for use in core testing, patient diagnosis and prevention, monitoring and treatment of disease and other health conditions.

The national hub-and-spoke model includes a national reference laboratory in New Delhi, regional reference lab in Kolkata and 191 other clinical laboratories, 2,153 patient service centers and 5,624 pick-up points. Customers consist of individual patients, hospitals and other healthcare providers and companies.

The diagnostic catalogue comprises 478 test panels, 2,425 pathology tests and 1,772 radiology and cardiology tests. The future growth strategy hinges on strengthening existing operations, expanding service offering, management of hospital-based and clinical laboratories and geographic expansion by setting up new clinical laboratories and regional reference laboratories and alliances and acquisitions. The aim is to tap incremental contracts for in-sourcing tests of hospitals and other clinical laboratories.

Kaveri Seed Company paid back to shareholders over Rs 200 crore each in the fiscal year ended March 2007 (FY 2017) and FY 2018. Free of debt, cash of Rs 389 crore end December 2018 is likely to increase significantly in near future. OP remained flat at Rs 252 crore in the nine months ended December 2018. The annual capital expenditure is expected to remain low, at Rs 30 to Rs 40 crore, compared with net fixed assets of Rs 183 crore. Besides producing seeds of major agricultural crops such as maize, cotton, sun flower, bajra, sorghum, rice and several vegetable crops on over 600 acres of farm land, the R&D efforts are focused on developing productive hybrid seeds.

Product concentration is among the key risks. The cotton seed business contributed 54% to the total revenues in the nine months of FY 2019. The objective is to reduce the share of cotton revenues to 40% over the next three years and increase the contribution of key non-cotton crops such as rice, maize and vegetables to 60%. These key crops command superior profit margins as well. Expansion will be by entering new markets such as Punjab, Chandigarh and Rajasthan. The plan is to expand beyond Bangladesh in international markets.

Debt-free Nesco is a cash-generating machine. Liquid resources including fixed maturity plans, mutual funds, cash and bank balances increased 4% to Rs 505.6 crore end March 2018 over a year ago. OP went up a marginal 2.6% to Rs 162.7 crore in the nine months of FY 2019. The cash-cow businesses — the Bombay exhibition centre, located in the western suburbs of Mumbai — contributed 37% to consolidated revenues. The exhibition and convention centre has a capacity of 59,000 square meters spread over six air-conditioned halls. The capacity is being expanded. Of the 127 exhibitions and conventions held in FY 2018, 14 were by new organizers.

The other business segments include an information technology (IT) park, industrial capital goods and hospitality. Completion of construction of IT building 4 (17 lakh square feet) is expected in near future. Revenues from the IT park, another cash-cow, come from leasing of IT park premises and providing services to IT and IT-enabled services providers. The hospitality division has commissioned two food courts and started food services within the complex. The target is to cater to the growing demand for quality food services from exhibition organizers, exhibitors, visitors and employees working in the IT park.

Moil explores, exploits and markets various grades of manganese ore and makes value-added products such as electrolytic manganese di-oxide and high carbon ferro manganese alloys at mine pit head. The public sector undertaking operates 10 mines in central India. Of these, three are run by open cast and seven by underground in narrow manganese ore body modes. Cash and liquid assets were Rs 2139 crore end March 2018. Free of debt, interim dividend of Rs 3 per share of face value of Rs 10 was announced in February 2019. Buyback of shares, representing 3.29% of the total number of outstanding shares, at a price of Rs 240 per share, was completed in FY 2018.

Mining lease of Parsoda manganese mine near village Parsoda, 46 km from Nagpur, was secured in CY 2016. The lease extends over an area of 53.75 hectares for 50 years. The mine is operated by open-cast mining method. Production started in March 2019. The objective is to increase production of manganese ore to three million tonnes (mt) by FY 2030 from the current level of 1.2 mt.

Castrol India's bank balance and cash and cash equivalent declined 5% to Rs 743.8 crore end December 2018. A final dividend of Rs 2.75 per share of face value Rs 5 was declared in January 2019 for the financial year ended December 2018. An interim dividend of Rs 2.25 per share was paid earlier. The UK-based parent, the BP group, controls 51% of the equity capital in the automotive and industrial lubricant manufacturer and marketer of synthetic, part-synthetic and conventional engine oils and specialty lubricants for cars, motorcycles, trucks and tractors. Flagship brands are Castrol, Activ, CRB, GTX and Magnatec. The distribution network consists of over one lakh retail sites and 23 warehouses.

Investment continued in expanding distribution and brands in CY 2018. Around 80% of the volume growth in CY 2018 was delivered by new products. The motor-cycle oils portfolio was strengthened by the introduction of bike-care products such as chain lubricants. As much as Rs 140 crore will be in the Silvassa plant over the next two years to scale up capacity by 50%. Escalation in raw material cost in CY 2018 was sought to be blunted by price hikes and cost management.

The brands of Tata Global Beverages are available in over 40 countries. The Tata group company has significant interest in tea, coffee and water and is the world's second largest packaged tea marketer. Around 330 million servings of its brands are consumed everyday around the world. The focus is on natural beverages. Regional and global beverage brands include Tata Tea, Tetley, Himalayan natural mineral water, Tata Water Plus and Tata Gluco+, Good Earth tea, Grand Coffee and Eight O'clock coffee.

Revenues of Tata Starbucks, a joint venture (JV) with US-based Starbucks, grew 30% in the December 2018 quarter over a year ago. There are 136 Starbuck outlets across eight cities. Revenues of another JV, NourishCo, were up 30% in the December 2018 quarter due to focus on the national rollout of Tata Gluco Plus, a refreshing energy drink. Recent launches in West Bengal and Jharkhand have received encouraging response. There was cash of Rs 1017 crore as of March 2018.

Founded in 1960, NBCC (India) is a Navratna central public sector enterprise operating in the three segments of project management consultancy (PMC), engineering procurement and construction (EPC) and real estate development. PMC is the largest revenue contributor, with a share of 93% in FY 2018. Re-development of government properties is undertaken by the PMC segment.

Subsidiary NBCC Services offering post construction maintenance services, design consultancy NBCC Engineering & Consultancy, NBCC Gulf Llc undertaking construction of buildings, roads and airports in Oman and neighboring countries, JV Real Estate Development & Construction Corporation of Rajasthan re-develops real estate projects in Rajasthan, NBCC International's focus is overseas business, NBCC Environment Engineering executes environment-related projects and Hindustan Steelworks Construction implements integrated steel plants.

The outstanding order book of around Rs 80000 crore end March 2018 is over 13 times the revenues in FY 2018. Without any debt, cash in hand was Rs 2481.9 crore end FY 2018.

Cyient provides engineering, manufacturing, geospatial, networks, and operations management services to clients in the aerospace and defense, communications, utilities and geospatial, transportation, industrial, energy and natural resources, semiconductor and medical technology and healthcare industries. The power of digital technology and advanced analytics capabilities along with domain knowledge and technical expertise are leveraged to solve complex business problems. The design-build-operate-and-maintain partner offers solutions across the value chain. The employee base of over 15,000 is spread across 21 countries.

The cash flow-to-OP conversion ratio remained healthy at 85.6%. Q3 of FY 2019 saw the highest-ever OP of Rs 174.9 crore. Cash balance was the highest ever at Rs 1203 crore, or US$ 176 million, end December 2018 after payment of dividend of Rs 80.9 crore. The dividend policy
is guided to remain stable, with payout
of 40%

The broad inorganic strategy of focusing on new geography-led expansion and services and consolidation of opportunities will continue. The JV with Blue Bird Aero Systems (Israel) completed dispatch of the first unmanned aerial vehicle system to a unit of the Indian army in the December 2018 quarter. Also, a solutions centre was opened at Peoria, Illinois in the US, and a new block inaugurated for one of the key customers in Pune.

Incorporated in 1992, Gujarat Pipavav Port operates the country's first private sector port at Pipavav in Gujarat. Promoter APM Terminals, holding 43.01% equity stake, offers port and terminal facilities in 58 countries. The all-weather port at Pipavav is around 152 nautical miles north-west of Mumbai and connects India with the Far East, Middle East, Africa, Europe and the US. The container-handling capacity stood at 1.35 million twenty-foot equivalent unit, bulk cargo capacity at four to five million tonnes per annum (mtpa) depending on the cargo mix and the liquid cargo capacity at about two mtpa. Marine, material-handling and storage operation services are also offered.

There is 38.8% equity stake in Pipavav Railway Corporation that undertakes construction, operations and maintenance of a railway line connecting the port to Surendranagar of Western Railway in Gujarat. An interim dividend of Rs 1.70 per share was paid in November 2018. Without any debt, cash on balance sheet was at Rs 431.6 crore end FY 2018.

BSE completed a buyback through open market purchases at a price not exceeding Rs 1100 per share in July 2018. As many as 20.19 lakh shares, or 3.7% of the issued capital, were bought back for Rs 166 crore. An interim dividend of Rs 5 per share was paid in November 2018. The country's second largest stock exchange by trading volumes operates in the four segments of listing or primary market; secondary market including mutual funds platform, new debt, membership and post trade;, data or information products; and supporting business comprising technology, index products and training. Over 5,000 companies are listed, the highest globally. Also on offer is a platform for trading in currency options and currency futures.

The average daily turnover in the equity segment declined 27% to Rs 3132.4 crore in the nine months of FY 2019 over a year ago. However, the average daily turnover in the currency derivatives increased 82% to Rs 31384 crore. On the star mutual funds platform, 9,119 schemes of 39 mutual funds are offered by 20,082 brokers for trade. The commodity segment commenced operation in October 2018 and recorded the highest daily turnover of Rs 621 crore in the same month. The segment has over 200 trading members and 27 clearing members.

The dividend payout ratio remained stable at 95% in FY 2018 compared with 93% in FY 2017. A windfall profit of Rs 462 crore was earned on divestment of equity stake in subsidiary Central Depository Services in FY 2018. Cash was a high of Rs 1969 crore end March 2018.

National Aluminium Company (Nalco), a Navaratna central public sector enterprise under the Ministry of Mines, manufactures and sells alumina and aluminum. Production facilities include a 22.75-lakh-tonne per annum (tpa) alumina refinery at Damanjodi in the Koraput district of Odisha and a 4.60-lakh-tpa aluminum smelter at Angul, Odisha. There are captive bauxite mines adjacent to the refinery plant and also a 1,200-MW captive thermal power plant near the smelter plant. Four wind power plants, with total capacity of 198.40 MW, are in Andhra Pradesh, Rajasthan and Maharashtra. Strategic investments have been made in one associate and two JVs.

The lowest-cost producer of metallurgical-grade alumina in the world announced an interim dividend of Rs 4.5 per share in March 2019. As much as 3.48% of paid-up capital was bought back at Rs 75 per share for Rs 505 crore in December 2018. Capital expenditure of Rs 1080 crore was incurred in FY 2018. Cash and bank balance remained healthy at Rs 2769 crore end FY 2018.

GE Power India, formerly Alstom India, has been making power generation equipment for thermal and hydro energy-based power projects since over 100 years. Country-wide presence of manufacturing units, sales offices and workshops offer a composite range of activities including engineering, procurement, manufacturing, construction and servicing of power plants and power equipment.

The business segments comprise boilers, mills, environmental control system, hydro, power services, gas power systems and automation control. Cash, bank balance and liquid investments remained healthy at Rs 1053.9 crore end FY 2018. Mutual funds owned 13.72% equity stake end December 2018.

Considering the current challenging market situation, a voluntary retirement scheme was introduced for workmen at the Maneja, Vadodara, factory in August 2018. Most workers opted for the plan. Operations at the factory ceased in August 2018. Various options are being explored to dispose of the land and building including machinery and equipment.

Conclusion

Considering that the stock market is near its all-time high, downside protection becomes an immediate concern. Cash offers a cushion during difficult times.

Companies with one-off cash gains should be ignored. The focus should be on companies with regular and stable cash generation from operations. Ability to generate cash depends on the activity of the company. Software, FMCG and pharmaceutical industries tend to produce significant cash. Multinational companies operate with lower leverage and fund capital expenditure through internal accruals. In contrast, several capital-heavy industries such as power, oil and gas exploration and metals have to resort to external borrowings. Therefore, solely focusing on companies with significant cash will make the portfolio lopsided.

It is essential to assess the growth strategies, particularly expansion and acquisitions plans. Cash on the balance sheet can evaporate in no time when a costly acquisition is made. Many acquirers have to assume debt to fund the purchases.