Keep debt low and do not take
BT-Yes Bank Best CFOs Survey
Not many people know that Saumen Chakraborty is good at blowing the conch shell and has even won some contests during Durga Puja festivals. Durga Puja is around the corner and this year the Chief Financial Officer at drug maker Dr Reddy's Laboratories has another reason to toot his horn - he has topped the latest Business Today-YES Bank Best CFO Survey.
Chakraborty, 52, works from his fourth-floor cabin at the company's new and tastefully designed all-glass corporate office on Jubilee Hills road in Hyderabad. When BT meets with him, he is peering into a tablet computer and a book is lying on his table. Thomas H. Davenport's Big Data @Work is about how companies can analyse and use the huge amount of information and leverage it to the advantage of their organisations. Looking up from the tablet's screen, he says: "People in finance are good with numbers but today you need to be able to connect the dots, be good at pattern recognition, generate new insights, come up with hypothesis, test it and help the management take a better and more informed decision."
A physics topper in college, Chakraborty graduated from the Indian Institute of Management, Ahmedabad, in 1984, the year Dr Reddy's was founded, and joined the drug maker in 2002. While it is still early days for Indian companies to talk about using big data, he is already looking to beef up his 200-strong finance team's skills in areas such as analytics and statistical modelling. He understands the spin-off benefits big data can provide to a pharmaceutical company: Imagine integrating data on doctors' prescription behaviour, diseases and drug supply with data on internal productivity. This, with better planning and an integrated supply chain could help improve sales and margins. "It is important to understand the customer better and deliver products in the most cost-effective manner," says Chakraborty.
But this is all for the long term. How does he intend to keep the company's finances healthy in the next few years?
Chakraborty says the company is making investments to develop products and expand manufacturing capacity. It spends about nine per cent of its revenue on research and development. The focus is on developing certain molecules that are difficult to make and face limited competition. "Our per-product development cost has gone up but rewards will also be accordingly higher. With all of these, we are hopeful of sustaining the wealth creation," he says.
Alok Dalal, analyst at brokerage Motilal Oswal, says Dr Reddy's has carefully managed its finances and has adequate funding in place for capital expenditure as well as research programmes. "Their costs have been under control. They have managed the currency [volatility] well and they were adequately hedged with respect to cash flows and balance-sheet hedging," he says.
Chakraborty says the drug maker will keep its debt levels low. In the BT-YES Bank survey, Dr Reddy's scored high on creating wealth as well as managing debt. Its net debt is 10 per cent of total shareholder equity. It reported a healthy 18 per cent return on equity, a key metric of profitability, in 2012/13. Chakraborty says the company is not taking high financial risks and would not like to be a high-debt company because the pharmaceutical sector already has a lot of operational and regulatory risks.
What if the company needs to borrow money for an acquisition? Chakraborty says the company will ensure net debt is no more than 50 per cent of total equity. The company has "the flexibility to go for a billion-dollar acquisition", he says, considering it has cash, cash equivalent and investments of about Rs 3,350 crore as of March 31. But he adds: "There has to be a good acquisition rationale and not just adding to the top line."
G.V. Prasad, Co-chairman, MD and CEO of Dr Reddy's, says a key challenge in the next three to five years will be to finance the company's business expansion and acquisitions in a capital-efficient manner. "The same Rs 100 should give you more growth," he explains.
What are the risks Dr Reddy's should watch out for?
There are risks the company has to knowingly take at times. For instance, it may decide to launch a generic drug after receiving approval from the US Food and Drug Administration even when it is involved in litigation with the innovator company. Prasad says the company has so far managed to safeguard itself from operational risks. It has also fixed a certain percentage of its operating profit as the permissible risk appetite, and has set up a board sub-committee to keep track of these risks every quarter. The biggest risk, however, is related to regulatory compliance. "While we have taken a lot of measures to build a culture and a robust process to effectively mitigate these risks, it will still be on top of the mind because if you falter here, the effects could be devastating," says Chakraborty.
Currency volatility is another risk the company must prepare for, says Dalal of Motilal Oswal. He expects foreign-exchange volatility over the next two to three months depending on government policies. Any further gain in the rupee versus the US dollar could pose a challenge because the company gets a large part of its revenue from exports, he says.
Chakraborty is aware of this risk as well and says the company hedges all balance-sheet items completely. The drug maker also hedges 40 to 60 per cent of its forecasted net cash flow over next 18 months. But, hedging for him is not a profit-making tool. "We are not in the business of speculation and making money from it," he says. "Hedging to us is only to mitigate risks to our main business, which is developing products and selling them to make money."
FULL COVERAGE:India's Best CFOs 2014