Lets see what it means to have a big negative FCF figure and why it spooks big investors.
Negative FCF essentially means, the company will require that much cash pumped into its system to keep the wheels turning. In other words, Negative FCF is the money extracted from the business due to
A. LOSS in operations.
B. CapEX.
So, LT will then have to borrow Rs.12000 Crore, which was 2013's -ve FCF. This will take its debt to over 55000 Crore. Really very scary! And the downcycle in Indian Economy is far from bottoming out!
Or it could dilute equity, which it last did in 2009. This too will drastically cut down EPS hence attracting tremendous FII selling.
All in all, buying LT now will be an investment BLUNDER.
For my money's worth, I will NOT buy LT at a penny over 2006 lows of Rs.300, that too only if it gets its affairs in order.
Before I buy LT, I need to see:
- Get the companies to pay-up and bring the Operating Cash Flow figure being at least mildly into the positive.
- Stop your expansions for the next decade and get your FCF into the green
- Reduce The Long Term Debt Figure by at least 50%. This will show your true earning power.
- And for Christ sake!, stop paying dividends if you don't have the cash!
I want the management to stop treating this Engineering behemoth of a company as a growth company. I want them to wake up and smell the coffee before its too late.