R.KannanHinduja Group

GRC Forum26th April 2013

Global Economy IMF projects global growth at 3.3 per cent in 2013 and 4

per cent in 2014.Recovery is not consistent in the affected advanced

economies.US growth continues to be steady.For the first time in the Economic History many of the well

developed countries are finding it difficult to come out of the crisis and the viable solutions are still not in sight.

There is an increased volatility in all the asset classes and it is very difficult to predict even the immediate short term developments in the asset price movements.

Uncertainty in the performance of Governments as well as corporate had increased.

Global EconomyThe focus of growth had shifted to Developing and

Developed countries. There is an increased protectionism in most of the countries

and many countries in the world had drawn up plans to encourage Small and Medium Enterprises.

At regular intervals, economic and financial system failures are being reported. There is an expectation which country will fail and how the crisis developing could be resolved.

Europe’s continued under performance.Reduced growth in international trade. The countries which were depending on Trade saw their

growth rates declining.Banks are not willing to lend . Banks do not even believe

other banks. Banks invest in government bonds instead of lending.

Indian Economy The potential for growth had come down from 10% a year to 8% a year

now due to structural changes in the Economy. The actual growth rate at around 5.0 per cent is much lower than what

was projected, while the CAD is likely to be considerably higher at about 5 per cent of GDP.

PM’s Economic Advisory Council projects a GDP growth of 6.4% in F 14.

The cost levels have gone up substantially in the last three years and the inflation has impacted almost all sectors of the economy and had reduced the purchasing power of individuals.

There is a considerable slow down in most sectors of the economy including the key industries and infrastructure due to slow down in decision making by the government due to competitive politics, active socialism and sensational press reporting.

The government had taken lot of new initiatives to kick start the growth rate and realising the situation we are in all the parties should cooperate with the government so that India’s long term competitiveness is preserved.

Performance of Corporates Many companies have witnessed falling sales and profits. By developing internally excellent operations alone will not help

corporates to report good performance. Today many of the variables affecting the performance of

companies lie outside the control of corporate. The developments in the Environment has a great bearing in the

performance of the companies. Many of the profitable sectors in the last few years have become

unattractive for doing business. The sectors like Micro finance, Power, Mining, Mutual Funds , Infrastructure and Real Estate , Telecom , Life Insurance have seen their fortunes fluctuate.

Performance of companies are determined by the developments in the Global Economy, Domestic Economy , Government regulation, supply chain issues and competition rather than an excellent operation.

Preparing long term plans have become a big challenge.

Performance of Corproates – 4200 companies in Q3 – F13

Particulars

Quarter EndedOct 12 - Dec 12

Latest Full Year

Rs Crore Var (%) Rs Crore Var (%)

Sales ** 1354120 8.6 4889882 21.4

Other Income ** 40964 41.2 113819 14.1

PBIDT 343402 16.0 1187568 17.6

Interest 173899 17.2 ; 577821 44.0

PBDT 169503 14.7 609747 0.3

Depreciation 36170 10.2 129183 11.1

PBT 133333 16.0 480564 -2.3

Tax 31798 -0.0 129726 -1.0

PAT 101535 22.2 350838 -2.8

Types of RisksPoliticalEconomic SocialTechnologyLegalEnvironmentFinancial Operational

Risk Management ProcessTo focus on the following componentsCorporates have to focus both qualitative and quantitative

risk Internal EnvironmentObjective Setting.Event IdentificationRisk AssessmentRisk ResponseControl activities Information and CommunicationMonitoring and course correction.

Benefits of the process Will complement Internal controls, code of ethics and compliance

culture. Can help to develop sound corporate governance practices. Better Informed decisions. Greater management consensus Increased management accountability Smoother compliant practices. Ability to meet strategic goals Reduced earnings volatility Increased profitability Competitive tool Risk based pricing strategy.

Risk Management There is a conflict between risk management and profit maximisation. There should be proactive approach to managing risk It has become a board level issue and monitored at regular intervals by

CEO’s. Have become one of the important functions in the volatile Economy. Many large corproates have created a full fledged function at senior levels

to manage risks. Helps to create competitiveness for the corporate. Rating agencies give a higher weight age for companies which have a well

organised risk management system. Revise the risk practices in line with the emerging trends. Create a risk aware culture. Create risk management owners at the enterprise, division, and unit level. Encourage firm wide communication on risk management. Maintain a level of risk that aligns with the company’s risk appetite. Scenario Planning and identify action plans all the visualised scenarios. Use strategic plans as basis for risk management programmes.

Growth StrategiesCompanies have to be very careful in deciding the growth

strategies.The sectors and countries which were attractive are no

more attractive today.The sectors which are very attractive today will not be

attractive in future.Careful evaluation of countries, products and customer

segments is required.Mergers and Acquisitions to be done with extreme care.Focus should be on short term growth and generation of

cash flows.Long term commitments on investment have to be taken

with big caution.

Operations ManagementExplore the scope for higher capacity utilisation.Adopt lean management principles.Focus on productivity of all the available resources.Reduce cost of operations.Explore the scope for outsourcing.Convert Fixed costs into variable costs.Follow an Asset light model.Addition to the capacity to be undertaken only after getting

a full visibility of using the total available capacity.Closely monitor the suppliers and their adaptability to

changing demand conditions.Closely monitor the change in Customer behaviour and

accordingly change product, pricing, distribution and promotion strategies.

Organisation Structure Large corporates should have a focussed risk management

function. Risks have to identified up to the level of each unit operation and

for each level , an owner has to be identified for managing the risk.

The people in charge of managing risks at different levels have to be empowered through well defined powers of authority.

There should be a constant and transparent communication to all the stakeholders.

Communicating the perceived risks to all the levels would help to get ideas to managing the perceived risks.

Risk aware culture has to be created.

Financial and Funds Management Close the accounts every month . Develop a robust criteria for new investments and portfolio

diversification. Strictly adhere to the criteria for investments. Focus on Cash generation. Conserve Cash Reduce the credit cycle time. Reduce the dependence on high levels of debt. Deleverage the Balance sheet if high levels of debt. Follow natural hedging strategies for forex exposure. Hedge the receivables and payables at a budgeted rate.

Reporting and Monitoring Financial statements have to be prepared at regular intervals. Key parameters to be monitored on a daily basis. Early warning indicators should be developed ( leading, lagging indicators

to be monitored to spot the warning signals). The tools like Leading indicators, Risk Inventory, Sensitivity analysis,

Scenario analysis could be used for reporting. The reports should be made at least once in a month. The parameters for monitoring could include Trends report, KPI’s , P&L ,

Balance sheet and cash flow.