A carmaker stretches supplier payment from 60 to 120 days through a bank programme and operating cash flow jumps Rs 1,200 crore. Is that free cash flow, and is it debt?

The Rs 1,200 crore is the one-time rise in payables from 60 to 120 days of Rs 7,300 crore of purchases, Rs 1,200 crore to Rs 2,400 crore; it is not recurring free cash flow, and the balance should be treated as debt. Next year the boost shrinks to about Rs 144 crore, the growth in payables. The bank, not the suppliers, is now the creditor for the extra 60 days, and if it withdraws the programme Rs 1,200 crore falls due within two months. Adjusted net debt stays at Rs 1,800 crore, 1.2x EBITDA, exactly where it was.

Payables are purchases times days outstanding. At 60 days on Rs 7,300 crore, Vegavati owed suppliers Rs 1,200 crore at any time; at 120 days it owes Rs 2,400 crore. The Rs 1,200 crore rise in payables is cash Vegavati kept instead of paying out, and it shows up as operating cash flow in the year the terms changed, once. Think of a household that switches from paying the electricity bill on the 1st to paying on the 30th: that month it has one extra bill's worth of cash in the account, and every later month looks exactly like before. Next year, with purchases up 6%, payables at 120 days grow to Rs 2,544 crore, an inflow of Rs 144 crore, so free cash flow returns to about Rs 744 crore after this year's Rs 1,800 crore.

Ask who is owed, for how long, and what happens if they stop. Under ordinary terms a supplier waited 60 days and bore Vegavati's credit risk as part of doing business. Under the programme the bank pays the supplier at day 10 and Vegavati pays the bank at day 120. For the extra 60 days the creditor is a bank, the amount is Rs 1,200 crore, the term is longer than trade practice, and the bank can decline to renew, in which case Rs 1,200 crore must be paid to suppliers within 60 days. That is a supply chain financeA bank pays a company's suppliers early at a discount and collects from the company later. It is a trade payable in form and a bank loan in substance when terms are extended beyond the industry norm. facility used to borrow, and rating agencies add the part beyond normal terms back to debt. Someone also pays interest: the discount the supplier gives the bank for 110 days of early payment is roughly 9% a year on the balance, about Rs 108 crore, and the supplier will recover it in prices over time.

Three adjustments. Strip the Rs 1,200 crore from free cash flow and show the sustainable figure of about Rs 600 crore. Add the programme balance beyond 60 days of purchases to debt, so leverage stays at 1.2x rather than the reported 0.4x. And flag the liquidity risk: the programme is uncommitted, so the undrawn bank lines must cover a Rs 1,200 crore unwind. The company has not created cash; it has swapped bank loans for bank-funded payables, which carry a shorter notice period and sit outside the reported debt. Not all of the Rs 1,200 crore is necessarily hidden borrowing: if the industry norm is 90 days, only the 30 days beyond it, Rs 600 crore, needs to be reclassified. Confirm the norm from peers before you fix the number. Accounting bodies have asked companies to disclose these programmes; check the latest disclosure requirements rather than relying on the balance sheet caption.

Close with the view. Treat the programme as debt, treat the cash release as a one-off, and treat the press release as a reason to ask what the undrawn lines look like. The judgement for a lender or rating analyst is that the company is no less levered than a year ago and somewhat more fragile, because Rs 1,200 crore of its funding can now disappear with a bank's decision.