The role of the chief financial officer of a company becomes all the more crucial in times of heightened economic uncertainty and volatility, such as the present. Instead of assessing the past, comparing actual amounts spent against amounts budgeted under different heads, he is now expected to forecast even the future, and how the company should cope with it.
As if it was not responsibility enough playing the role of a co-pilot - to the CEO, the pilot steering the company like an aircraft - he has had, in the last two years, to pay particular attention to two specific areas. One, he has to manage working capital better ; two, he must manage debt better and bring down costs. These are not easy tasks. A recent report by India Ratings & Research, a subsidiary of global rating agency Fitch, shows cash margin deterioration in the BSE 500 companies continued in 2012/13, though at a slower pace than in 2011/12. Indeed fund from operations (FFO) and cash from operations have been showing a deteriorating trend since 2010, indicating that revenue growth and operating margins were being financed by relatively higher levels of working capital. This means that the cash generating ability of these companies, which in turn determines the ability to service debt, has fallen at a pace faster the drop in operating profit indicates. Of the 233 companies which have declared their results for the quarter ending March 2013, 138 - or about 60 per cent - have shown a decline in both operating profit and FFO margins.
This is primarily due to drastic changes in the global financial markets. Overnight things changed and no one was able to see it coming. Just a few years ago corporate houses were pursuing rapid expansion since capital was cheap, access to equity capital was easy, the rupee was strong and most importantly, GDP growth of around seven to eight per cent seemed a given. Corporate India has been caught on the wrong foot with the GDP growth rate shrinking, capital becoming expensive and the rupee weakening. All this has made the CFO's task that much more difficult. A good number have simply given up. There have been a host of recent CFO exits in the infrastructure and construction sectors which are reeling under the pressure of poor business and rising costs.
"CFOs can be grouped in three categories," says Saurabh Mukherjea, Head of Equities at financial services firm Ambit Capital. "There are the promoter run companies where the CFO has become an accounts manager. There are the Indian executive companies such as L&T, HDFC and Info Edge where the CFO is still an equal to the CEO. And the third, there are the CFOs in multinational companies that are sitting on comfortable cash reserves, such as Hindustan Unilever or GlaxoSmithKline."
Many CFOs have shifted their priorities to manage in a difficult environment. "In this market one would be tempted to go in for top-line growth, but as a CFO my job in these bad times is not to go after orders if they do not bring in the money. My aim is not to drive the top-line, but the bottom-line and on a sustainable basis," says Sunil Mathur, Executive Director and CFO at Siemens India. Amit Maheshwari, Partner at Ashok Maheshwary & Associates, agrees. "Due to the heightened uncertainty and volatility of the past year, CEOs have become risk averse and the role of the CFOs has thus been limited to managing risk and assets," he says. "Managing risk, setting the strategic direction and effectively working with the top management will be the primary responsibilities of CFOs in coming days."
Another area that has become increasingly important for the CFO is corporate governance, what with scams involving corporate houses repeatedly being exposed. Yet another is tax exposure, with even MNCs feeling the heat of the government's ever changing tax laws.
|Top 875 companies||FY2012||FY2011||Change (in %)|
|Total Income||5,102,403||4,163,347|| 23|
|Other Income||15,557 || 12,052 ||29|
| Total Expenses ||4,872,872|| 3,916,954 ||24|
| PBDITA ||784,061||729,659|| 7|
| PAT ||289,762||315,205||-8|
|Source: BT Research|
|Figures in Rs crore|
A comparison of the financial performance of the same companies for third and fourth quarters of 2012/13 shows 90 companies had lower revenues, operating profit declined in 115 and after-tax profit in 106. There are concerns that companies are still carrying more debt than they should, and their ability to repay is uncertain. The India Ratings & Research report says bank loan exposures to sectors on which its outlook is negative went up to 30 per cent in early 2013 (it was seven per cent in 2011). Just 22 companies have an outstanding debt of nearly Rs 1,27,000 crore. These companies could become distressed by the end of the current financial year. "We need to convert challenge into opportunity and utilise this dip to our advantage," says Siemens' Mathur. "One way of doing so is to spend time training our people and products, so that when the good times arrive we are prepared." Meanwhile, analysts are hoping that if the rupee doesn't weaken further then by the second half of 2013/14 - on the back of a favourable monsoon, the fall in the inflation rate which may lead to a further easing of interest rates - Indian industry will rise again.