Across the globe, today's CFOs are juggling more balls in the air and that, too, in front of an audience that is more demanding and knowledgeable than ever before. Never before has it been more complex, multi-faceted and rewarding.
In any business environment sustainable leadership and presence can be achieved only when leaders, especially CFOs, strive for excellence, re-invent and re-equip themselves well before others in terms of embracing technologies for future with strong commitment to serve the end consumer. Understanding and managing the complete value chain of such gigantic and complex engineering enterprise at a time when growth, stability, profitability and, more significantly, liquidity is not merely a challenge but virtually a war for survival. I feel the CFO plays a vital role in shaping the destiny of the company and guiding it to newer peaks and for survival during period of struggle and adversity.
Changing regulations, increased regulatory scrutiny, enhanced disclosure and transparency norms, and greater shareholder involvement coupled with subdued business environment have dramatically changed the role and responsibilities of the CFO, especially of state-run organisations such as BHEL. The growth story of the Indian power sector is under threat due to issues associated with coal linkages, land acquisition, tougher environmental laws, challenges arising from stiff commissioning targets, increased competition, and pressure on pricing and margins. Under such circumstances, as BHEL's CFO, I had to play the role of a strategic partner to create value for all stakeholders across the value chain and get involved in decision making in other business functions such as human capital management, resource planning and market competitiveness.
#Revenue: Rs 49,627 crore, up 14%
#EBITDA: Rs 9,951 crore, up 15%
#Net Profit: Rs 7,087 crore, up 17%
(Figures for 2011/12; Source: Annual Reports)
#Net foreign exchange earnings jumped 450% to Rs 4,604 crore in 2011/12
#BHEL invested Rs 1,199 crore in R&D and filed 351 patents in 2011/12
#Dividend payout ratio in 2011/12 was 26%
#BHEL's market value is more than the aggregate of next five companies in its segment
BHEL's major challenges last fiscal year, especially for the CFO, emanated from a variety of external factors which had significant influence on its finances and liquidity. On one hand, the challenge was to at least maintain the top line if not grow it. Oh the other, sustaining the bottom line and managing liquidity with the minimum borrowing cost was even greater challenge given the fact that I was faced with the most tricky balancing act to ensure that the focus on future positioning of the organisation in terms of technology upgrade and acquisition, and enhanced research and development efforts are not lost sight of. Depleting coal reserves and increasing cost of fossil fuels necessitated the emergence of newer technologies with improved efficiency in the form of supercritical technology in power plants.
BHEL spent Rs 1,248 crore on R&D with 385 patents and copyrights filed - the highest ever in a year. The company identified 145 technology plans with over 1,500 R&D projects to establish self-sufficiency in areas such as ultra high voltage transmission, transportation, ultra supercritical plants, renewable energy, and water. A technology licence agreement for flue gas desulphurisation system to address environmental issues was also finalised during the previous fiscal year. Design automation and knowledge-based engineering projects were taken up for all major products across the company to offer optimized benchmark solutions. The company invested Rs 753 crore to boost manufacturing capacity and modernise factories, and Rs 83 crore on rebuilding and retrofitting of existing facilities in 2012/13.
The company undertook collaborative initiatives to address the growing demand potential in railway transportation. This included a strategic tie-up with a global player for the metro business and an MoU with Indian Railways to set up a coach factory.
The company successfully managed huge outlays aimed at future positioning amid the changing scenario and market requirements, despite facing challenges arising due to weak financials of state utilities and funding issues with other power producers due to lack of fuel supply agreements, environmental clearances and other factors.
Strategies for cost control resulted in savings of more than Rs 600 crore. Our thrust on innovative measures such as bulk tendering, techno-commercial MoUs, e-procurement and reverse auctioning resulted in savings of nearly 1.5 per cent in material cost. This helped improve competitiveness and reduced the cash outlay by about Rs 400 crore. BHEL commissioned 10,340 megawatt of power plant equipment during the previous fiscal year. The company has also created a dedicated systems group to focus on after-sales services and expand offerings in renovation and modernisation of power plants.
In a market with suppressed demand, limited receipt of advances due to constrained order inflows to BHEL during 2011/12 and 2012/13 did impact the working capital position. Real-time monitoring of inflows and outflows through e-banking wherein more than 80 per cent of inflows were received in a centralised cash management account at the corporate office and more than 95 per cent of payments for the entire corporation done through the electronic mode resulted in fine planning of cash flows through the year and helped close the financial year with a healthy cash and bank balance. Adoption of innovative cash and financial management techniques resulted in earning average interest yield significantly more than the market rate and helped bring down the average borrowing cost below the industry average.
At BHEL we are always looking to grab opportunities to improve operational parameters. For instance, after the central bank guidelines on extending the interest subvention scheme in January 2013 for exporters in the engineering sector, BHEL was among the first state-run companies to avail the benefits.
Shifting focus towards efficient debtors and inventory management along with an in-depth analysis of the financial position of customers before effecting supplies proved beneficial. Manufacturing, deliveries and execution were prioritized for customers who helped in consistent inflows. As a result, the rising trend of debtors was arrested. The inventory level was brought down from 100 days of turnover to 83 days. Given the size of the company, balancing different components of working capital is still the biggest challenge. This is more so because the power sector is facing problems related to funding, land and fuel availability.
Understanding the emotional drivers of different groups, selling changes to staff, board members and to various stakeholders is not easy for any CFO, especially of a public-sector company. Factors which are critical to the organisation's success must be the foundation stones of all performance measures. I believe an effective CFO needs to exhibit confidence borne from a healthy self belief, paint a clear vision of what the organisation and finance team can achieve, and determine what legacy he wishes to leave with the organisation.
P.K. Bajpai is Director (Finance) of BHEL. He has been adjudged the Best CFO of a PSU (Large).