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FinalTreasuryManagmentAs the owner and /or CEO of your HR Consultancy firm, cash flow management is a constant topic of discussions with the finance and accounts team.

What do with the excess cash in hand? Where should it be deployed so that it works a little bit more and grows whilst being highly liquid and safe? How does one ensure that enough reserves are maintained to fund working capital expenses during the low business cycles?

What makes cashflow management critical is that it helps the firm maintain the business flow and also balance better returns for idle money. This in turn goes a long way in ensuring operational functioning and continuity. The question is how is this achieved?

First things first, when you talk about treasury management, you are indirectly referring to constant flow of money in very short time periods. And as most boutique/SME’s face volatile business turnovers, money can be required on priority basis at any point. Hence the priority in Treasury Management primarily lies in ensuring liquidity and safety of capital invested rather than high returns.

Secondly, while significant growth in short term investments should not be expected; it should not necessarily be considered that there are no better options other than the company current account. While Fixed Deposits and Recurring Deposits have been traditional avenues for company owners to park extra monies, they remain inefficient from a taxation perspective. Tax Deducted at Source (TDS) is a definite thorn as tax incidence is occurring even though there are no capital gains received in hand.  Furthermore, falling interest rate scenarios are making them an even less attractive option.

An alternative that should be considered is liquid/ultra short Term/ short term debt mutual funds. Two aspects they score over traditional avenues is (A) they usually do not have any exit penalties  as compared to bank FDs and (B) they are more tax efficient due to tax deferment, as tax incidence only occurs at the time of realised capital gains at the hands of the investor, and they are eligible for indexation benefits as gains from any debt mutual fund investment held for 3 years or longer are taxed at 20% after indexation, thereby improving post tax returns.

In addition, often companies decide to park certain monies with a longer term view. This could be to prepare for possible expansion/acquisition as envisaged in their business plans. But as the requirement of funds is not in the immediate future, short term investment options might not work out in the best interest. Hence separate planning should be considered for such investment purposes.

Last but not least, understanding past company cashflows and extrapolating the data to approximate future cashflows is essential to determine the kind of investment strategy would be ideal. This analysis, while including business growth projections, should also include current liability repayments and expected abnormal gains in the future.

While managing cashflows will indeed be a constant objective, through efficient planning and proper advisory it need not become a source of constant headaches.

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Retirement 1Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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Issue Detail:
Issue Open: Mar 8, 2017 – Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,393,631 Equity Shares of Rs 10 aggregating up to Rs 1,865.57 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs. 295 – Rs. 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE

D’mart (Avenues Supermarket), which is in the retail business with 118 stores, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues), has clearly come at a time where the global view on equities has turned positive, and volatility in equities is at record lows. IPOs like Snapchat in the US have created significant short term gains for investors, and Indian investors are seeking a repeat.  The fact that D’mart is associated with Radhakrishan Damani, believed to be one of the sharpest long term investors in India, has only added to the frenzy. The penetration and development of retail businesses in India have been a much discussed opportunity over the last decade, and the shift from unorganised to organised, and from offline to online, continue to be much talked about.

Whilst there is no doubt that this shift has begun and is only likely to increase significantly going forward,  as individuals and families gain more and more comfort with these formats and decide which one works best for themselves, one needs to keep in mind that margins in most retail businesses tend to be very slim, and thus investors will need to be very patient with these businesses, as they scale and maintain/try to grow margins simultaneously, in spite of significant competition. Customer loyalty across these formats will also be tested , as consumers do tend to be very price sensitive in most retail segments.

Whilst revenue and earnings growth for the business have been very decent at 35 – 40% CAGR  over the last few years, and the profit margins and other numbers are better than competition, with further scope to possibly expand through the use of private labels, one will need to remember that businesses of this type will create wealth for investors if they are truly thinking very long term. At a P/E of 36 times, even though cheaper than other players in the retail space, and with a model that is very efficient with use of capital, real estate and its supply chain, this IPO is  not cheap.

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With expectations of significant listing gains pushing investors to try to get a share of the pie, and the issue size being only about Rs 1870 crores, most investors in the retail segment are not likely to get any shares at all, or even if they do, the net impact on their portfolio is likely to be minimal due to the small holding that they will get. For high net worth investors taking leveraged positions, a very high over subscription rate could essentially mean that their interest costs are also likely to be very significant.

With an uncertain global environment on the back of a possible US rate hike coming up, this issue is appropriate only for investors with a high risk appetite, or investors taking a very long term view of their portfolio in our view.

Just like Retail is all about detail, stock investing is all about earnings so keep your eyes focussed there and see how retail businesses continue to grow their earnings going forward, and deal with significant competition pressures.

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Plan Ahead has won the Outlook Money Best Investment Advisor of the year 2016

 

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Plan Ahead would like to express our heart felt gratitude to our clients for the unstinting support, basis which we continue to strive to be the best advisor in the country. 

Thank you and we look forward to your continued support and encouragement.

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Whilst there was a consensus view of RBI cutting repo rates today, with only the extent of the rate cut being questioned (would it be 0.25% or 0.5%?), Urjit Patel or rather the monetary policy committee (MPC) sprung a surprise by keeping rates unchanged. Both equity and bond markets reacted negatively to this as they were pricing in at least a 0.25% cut.

RBI was probably concerned by multiple factors – volatility in global financial markets that could be caused by a Fed rate hike, issues in the Eurozone, oil price rises, and the potential stickiness of consumer inflation around non food components.

One needs to remember that inflation targeting continues to be the core role of the RBI moving forward, and any risks to inflation are likely to result in a more conservative approach, tilted towards managing inflation in the inflation growth trade off.  In addition, the focus towards management by data is a significant positive, as markets can sometimes allow emotions to override incoming data, that may be to the contrary.

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Your investments

The demonetisation impact on the Indian economy continues to be rather speculative in our opinion, with a very wide range of possible outcomes,. and data around the same is likely to continue to throw up surprises. For example, we have seen over the last few weeks, the quantum of cash deposits that have come back to the banking system have been significantly larger than originally anticipated. In light of the need to take portfolio investment decisions basis data, it may be prudent to look for broader trends to capture through your investment strategy for example fixed income products continue to offer a real rate of return in the region of close to 2%, continuing to make fixed income investments an attractive option. With liquidity continuing to be significant, it would be prudent to look at locking into current interest rates, through a combination of accrual oriented short term and medium term funds, tax free bonds and to also cover reinvestment risk. A portion of the fixed income allocations can continue to be allocated to taking the benefits of falling interest rates, by investing into dynamic bond funds where the fund manager has the flexibility to move portfolio durations driven by incoming data. Equity investors may need to enhance exposures gradually through a combination of rupee averaging and value averaging strategies, as the potential slowdown on the back of a US rate hike and a consumption slowdown driven by demonetisation, is balanced by possible liquidity flows from Japan and the EU, as well as equity prices, especially of large cap indices, now at levels much closer to fair value after the recent correction.

Your loans

With the expectation of cost of funds for banks coming down post demonetisation, banks’ lending rates are likely to continue to slide further down. Since April 1, 2016, when the MCLR was introduced, most banks have been reducing it gradually as their cost of funds came down. The huge inflow of funds post demonetisation could make them cut MCLR  further. Thus one can expect loan rates to continue to head downwards, creating some additional consumption or investing surpluses for families with loans.

Way Ahead

The RBI is clearly aware of the danger to the GDP growth rate and possible liquidity outflows, driven by the twin impact of demonetization and higher interest rates in the US. Thus a wait and watch policy may actually be a great idea. Whilst everyone will await the next policy on Feb 8th, one needs to remember that action by the RBI can also be done prior to that if necessary, and therefore should not be ruled out. After all, surprises and the independent nature of the RBI are back in fashion.

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