CFO Perspectives

CFO PerspectivesIndia CFO Newsletter October 2016

CFO SpeaksMr. Rajiv BatraChief Financial OfficerCummins Group of Companies01. Government has been making lotof efforts to improve upon easeof doing business. What are yourviews as a CFO and do you feelthat the things have changed?The intent is clearly evident-thequestion lies between intent versusreality. We are hearing the appropriateintent and clearly it has become easierto deal with the government. Howeverthe efforts are concentrated in pocketsand need to cascade. The majorproblem today is for the new entrants,where we have myriad laws, legislationsand approvals to go through for a newset-up. There is need for a proactiveplan, like single-window clearance todeal with all approvals, else it could be adrag on our country’s investments andgrowth.On the other hand, transfer pricinglitigations and back-log of appealscontinue to derail the businesssentiments. A lot of valuable timeis wasted by judiciary in discussingpublic interest litigations (“PILs”) andinterfering in day-to-day affairs. Therole of judiciary needs to be definedclearly; whether they are to work as anexecutive or to interpret laws?Certainly we have seen an improvementin ease of doing business especially forindustries like infrastructure, railways,defense and roads – where the projectsare getting back on track and businessis gaining traction. However, we stillneed to do significant work for the otherindustries to fuel our economy. Indiaranks 130 in the list of 189 countries inease of doing business and thus has along way to go.

02. With GST not being too faraway, how well you thinkindustry is prepared? Further,as a CFO what are the benefitsyou foresee for the Indianeconomy?A formal notification for GST is yetawaited. It will be in place in fewmonths’ time and industry is lookingseriously towards it. Its impact isgoing to be positive and will help inuninterrupted flow of goods, whichshould increase the utilization ofcommercial vehicles by 30%. It willhelp reduce barriers and permitswhich would also lead towards easeof doing business.sectors, but time will tell how muchof it will be passed on to the marketafter the pricing strategies are relooked. However, with advent of GST,compliance will increase and taxbase for the government should alsoincrease.03. Regulatory compliance hasalways been challenging forthe finance functions. Howdo you ensure that thesecompliances are effectivelymanaged?As an industry, we also need to doour planning correctly basis thelegislation. Going forward, we maynot need to have warehouses forcommercial considerations and willkeep them only when needed. GSTwill be a reform leading towardsmodification of supply chain andthe way we do business. We alsoneed to gear-up our IT systems andbusiness processes.We have to be compliant with alllaws, it is a non-negotiable positionfor us. Thus, these transitions havenot made much difference, but nowwe have to see the implementationmore carefully than in the past.Internal Financial Controls (IFC) isalso not a major challenge as wewere complying with SEC regulations,though some modifications havebeen made. Going forward, weforesee board meetings gainingmore attention and time, and maybe a 2 day affair instead of a 4 hoursmeeting.Benefit of GST will trickle down onlywith time to boost the economy.It will influence the numbers, butwhether the percentage of GDPwill increase remains to be seen,although 1% or 1.5% increase isbeing much talked about. It will havea cascading impact on most of theHowever, it has impacted mostof the corporate India and thereare companies which have beensignificantly impacted and havedeployed additional resources tomeet the compliance norms. But yes,this is the right thing to do and goodcompliance is more important from

a global standpoint as well. I don’t feelthat we are over-regulated. GST will alsotransform the compliance structure innext 24 months, for which IT systems ofthe government and the industry has tobe well prepared and effective for thecredit transactions. Diligence will alsohave to increase from both the ends.04. What are the challengesassociated with your exportbusiness; and as a CFO how doyou tackle the fluctuations inrevenue?Export volumes are lot more dynamicnow, than it used to be in earlier days.Three years before we used to be ableto predict for 180 days, however, incurrent scenario we can’t even predict45 days from now. We also need tomanage our long import pipelines.Boom in export demand is not alwaysgood for production, inventory and cost.Our end markets have fallen, whetherit be Africa, Middle East or Russia. EUis also unstable and trying to wake upfrom the negative GDP, whereas theUS has shown some revival but futureis not certain. Currency doesn’t makeit easy either with fluctuations beingso unpredictable. We have seen USDrising from INR 48 to 67 in 24 months.All these need to be managed in parallelto reduce the risk in foreign currencyborrowing. It does take significanttime of the management to takequick actions and to see that we arenot compromised. Thus, we need tomanage exposure and see to it that weare not over exposed.

05. As a CFO, you are expected toplay the role of both strategistand the business lead. Howdo you balance betweencompany’s financial goalsvis-à-vis company’s growthambitions?We have doubled our growth in last5 years by investing in growth areasand gearing-up the related activities.On the other hand, we are alsoidentifying the areas for not investingwherein the growth opportunitiesare minimal. We also understandthat some parts of businessesrequire long-term investment due totheir persistent gestation period andthus, we cannot cut the R&D spendsin bad times.For power generation equipment,there have been significant changesfrom government on the emissioncycles. Also the technology haschanged the game in automotivesector and significant money is beingspent to invest on change from BS IVto BS VI (Indian emission standards– Bharat Stage IV to Bharat Stage VI).We have done R&D and technologyinvestments in a big way and that toowith comparatively less shareholderborrowing. We will need time of3 years to recover and manageshareholders expectations. At theend, we ensure a “balancing mix” tomeet company’s financial as well asgrowth ambitions.

06. In today’s dynamic worldof economic volatility, taxreforms and changingregulations, the scope of CFO’sresponsibilities has constantlyevolved. How do you build theright tWalent for your team?We do not have any significantrecruitment from outside for ourfinance function. People are grownwithin the organization and financeprograms are in place. In goodyears we take around 20 charteredaccountants (CAs) from campusesand in bad year 10-12 CAs. Weidentify people and send them onoverseas assignments. We have lotof institutional tie-ups too for furthereducational courses. Based on theirranking, best performers are sentto Kellogg and remaining are sentto Indian institutes like, SP Jain, IIM,etc. Thus, we invest both time andmoney to groom talent within theorganization and we also have seniormanagement assigned to them asmentors. Thereafter, we have talentpipeline review every 6 months withleadership to identify our futuretalent. Thus, except for special skilltasks like tax, we do not recruitlaterally from outside.We do have iterations on bothsides; the ones who would havehad brighter future with us and theothers whom we want to leave. Wetry and retain the ones we want tostay with us. We give them mix ofexposure from US to India and ofvarious businesses.07. According to you, what are thethree traits that describe a topperforming CFO?i. C FOs can no longer workin isolation They need tounderstand and be closeto the business in buildingresponsible partnerships. It’simportant to wear hats ofboth finance and business,along with governance andbe part of valuable decisionmaking with a vestedinterest for business growth.ii. Be authentic and honest,by investing in themselvesto create value for companyto grow, and motivate selfand team for delivering highperformance.iii. Lastly, a CFO needs to spotopportunities in advanceand encash them ahead ofthe competition.

Expert ViewsCFOs – Driving industry performanceToday, CFOs are important catalystsof Indian corporates drivingbusiness expansion, revenues, jobsand more importantly creatingwealth for the organizations. In thecurrent environment, CFOs are notsupposed to be just strategists, butpragmatic strategists. It therefore isimportant to understand the outlookof a CFO towards the economy andbusiness; which in turn helps thefinance function to set their prioritiesright and strategize better in thedynamic environment. Deloitte Indiaconducted a CFO Survey* whichhighlights the viewpoint of over300 CFOs across industry on theIndian economy, investment climate,industry expectations and CFO’s role.

Macro economy90 percent of the CFOs expressed confidence in the economy over themedium and long-term. #Strong economic performance amid global challenges, ongoing economicreforms, fiscal discipline, and astute monetary policy have contributedin shaping the positive outlook for CFOs; while there still exist significanteconomic challenges.RegulatoryimpedimentsSlowdown indomestic economySignificant economicchallengesUncertainty intax environmentCurrency and commodityvolatilityFig.1 – Significant economic challenges faced by CFOsThe CFOs felt that a lot needs to bedone to further improve the easeof doing business in India and thegovernment also recognizes it asan area of further improvement.CFOs feel more confident aboutthe government programmes andbelieve that rationalizing existinglaws, encouraging FDIs, increasinggovernance efficiency andgovernment’s willingness to seekfeedback from the industries havepositively impacted the businessenvironment. A large number of CFOsalso seem to believe that the overallclimate for investment has improved.However, they remain equally dividedon whether it is the right time to takerisks.

Industry expectations25 percent CFOs believe that innovation and technology will drive futureinvestment trends while 24 percent believe need to increase the marketshare and customer base would determine investment trends. #In current environment it isimportant for CFOs to gaugeindustry expectation, which is drivenby factors like, investment trends,domestic/ cross-border challengesin M&A and changes in technology.Investment trend expectationsreflect corporate India’s changingneeds amidst the existing economicand business environment, whereasthe M&A space has a number ofissues that need to be addressedInvestmenttrends Innovation andtechnology Market/customerexpansion New productlaunchesM&Achallenges Complex/multipleregulatoryapprovals Governancestructures Unrealisticvaluationsby the government to create amore favourable environment forcompanies and CFOs to operate in.At the same time, in a volatileeconomic scenario where the paceof technological advances arecontinuously accelerating, CFOsneed to adapt to these changes andimplement them in order to optimizegrowth through technology.Technologicalchanges Analyticssolutions Enterprisemobilitysolution Cloud basedsolutionsIndustrychallenges Market growth Industryregulation/legislation TalentavailabilityFig.2 – Top three investment trends, M&A challenges, technological changes and industry challenges