Why Indian CFOs may no longer be risk averse

BT-Yes Bank Best CFOs Survey

R. Shankar Raman, Chief Financial Officer of Larsen & Toubro (L&T), a $14-billion engineering and construction conglomerate, has seen it all. An L&T veteran, who took over from Y.M. Deosthalee (winner of Business Today's Best Overall CFO award for 2011) in September 2011, he has been busy, in the last few years, trying to navigate the tough business environment with the onset of the economic downturn. His focus so far has been on cutting costs and managing on tight budgets.

But with a new government at the Centre, there are expectations in the industry of an economic turnaround, says Raman. With gross domestic product growing at 5.7 per cent in the first quarter of 2014/15, the highest in nine quarters, there is an undercurrent of hope and bullishness as reflected in the strengthening of the rupee and the rally on Dalal Street.

"It is delivery time, but the transition from a slowing economy to a revival of growth will be gradual. If the government gets its act together, then by the middle of 2015/16 we may see a clear recovery. Until then it will be wait and watch," adds Raman.

It echoes the sentiments of many CFOs in the industry. The sudden change in mood is obviously the result of the stable National Democratic Alliance government led by Prime Minister Narendra Modi, which came to power at the Centre after a resouding victory in the general elections held in April and May. The new government is already talking about reforms and kick-starting pending projects.

The focus of attention is clearly shifting for Indian CFOs. After the global financial crisis of 2008, they were more focused on liquidity management. Later, the primary goal was leverage management, due to a debt overhang. "Though risk management will continue to remain in focus, the hopes of an expected revival will see CFOs starting to take risks rather than being risk averse," says Raman. Deep Mukherjee, Senior Director at India Ratings & Research, agrees. "The worst may be behind us, but one has to remain guarded," he says.

However, there have always been CFOs and corporate honchos who outperformed even in the worst of times. Every year the Business Today-YES Bank Best CFO Study identifies and honours these individuals. This year too, we have awards for 16 such CFOs across 10 categories (see And The Winners Are). The winners have been picked up by an eminent jury led by Subir Gokarn, former deputy governor of the Reserve Bank of India, after a comprehensive analysis of financial statements of BT 500 listed companies followed by a survey among chartered accountants, stockbrokers and fund managers.

CFO's Emerging Role

The role of the modern day CFO has moved beyond just controlling or managing company finances to becoming a trustee of the stakeholders and playing a pivotal role in deciding the strategic direction of the company. After the global financial crisis in 2008, the role of the CFOs has been enlarged. and they increasingly guide the board on critical decisions on strategy, governance, risk management, capital allocation and portfolio management, according to Koushik Chatterjee, Group Executive Director (Finance & Corporate) at Tata Steel. "The challenge is to have a deep understanding of, and develop an independent view on, the key management processes to influence the management and the board in a manner that creates a sustainable and value creating organisation," says Chatterjee.

According to a recent survey by professional services firm Deloitte, half the time of a CFO in India is devoted to playing a strategic and catalytic role rather than just managing finances. "Five years back, it was one-third. In the next three to five years, I see two-thirds of a CFO's time being spent on strategy," says Sanjoy Sen, Senior Director, Deloitte.

Meanwhile, many in the industry feel that if the Narendra Modi government can revive the Indian economy, the CFOs will have to step on the gas and raise resources to expand the business or scout for acquisition opportunities. "The foremost task before the CFO will be to manage liquidity to bring the business back in shape, enabling it to capitalise on the new growth opportunities so as to first operate at the optimal level. Once that level of stability is achieved, with a better investment climate and structural reform, companies would be able to go that one step further to leverage growth and expansion plans," says Akhil Jindal, Director (Group Finance & Strategy) at Welspun Group.

To achieve their goals, it is important for CFOs to challenge their colleagues in other divisions, according to Subbu Subramaniam, CFO and Executive Director, Titan Company, a winner in the "Commitment to triple bottomline" category in our study. "You don't need to be a popular CFO all the time to be a good one. You can speak your mind," he says.

Indeed, in the years ahead, the CFO's role will continue to be reshaped and redefined as the external environment changes and the complexity of operating global businesses increases. The governance and regulatory challenges coupled with the need to assess risks facing the company and the industry will require the CFOs to play a bigger role.

"Some fundamental responsibilities still remain crucial to the role of a CFO such as governance, compliance and financials to name a few. But CFOs are gradually making the transition to becoming broader strategic advisers," says Jindal of Welspun. "They will no longer be confined to being followers. They have to be in the driver's seat evaluating and analysing the implications of the actions being taken by the CEO, since the onus lies on the CFO in terms of ensuring regulatory compliance and accountability."

In other words, the CFO has to work very closely with the CEO in putting together a cohesive strategy. "The challenge for the CFO lies in keeping the company focused and motivated during difficult periods," says K.K. Maheshwari, Managing Director of viscose staple fibre and cement maker Grasim.

Managing risks and a strong oversight role in the execution of business strategies will thus be the critical responsibilities of the CFO over the next 18 to 24 months. "I don't think managing the capital structure and liquidity are mutually exclusive objectives," says Chatterjee of Tata Steel. "From a management prudence perspective, it is important to frame the growth strategy in the context of how the external macro-environment supports the organisation's own risk capacity and financial strategy. I would therefore always advocate a more holistic approach towards balancing growth and risks for sustainable economic value creation."

Mukerjee of India Ratings, however, has a word of caution. "Though one can afford to remain hopeful it is not a scenario in which to be adventurous," he says. But he tempers the caution as well. "Credit stress for the majority of sectors is unlikely to deteriorate further in 2014/15," he adds.

The annual study to identify the Best CFOs in India has been a regular fixture in Business Today since 2007. As in the previous five years, the rankings have been arrived at in partnership with YES Bank. We profile the overall winner, Saumen Chakraborty, CFO at Dr Reddy's, followed by shorter profiles of the other winners. How We Did It explains the methodology used to arrive at the final list of winners.

*An earlier version of the article carried the company's name as Titan Industries in place of Titan Company. Changes have been made.