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This 7th of December is the International Civil Aviation Day and marks the 50th Anniversary of the signing of the Convention on International Civil Aviation.The purpose of this day, as pilots all over might be well aware of, is to recognize the importance of aviation to the overall development of the world.

And while pilots draw great confidence from being able to manage the process of reaching passengers to their destinations safely and comfortably, a more pressing question can be that are they confident when it comes to management of their finances?

The profession of a pilot demands almost all their time all year round. Hence they are left with limited personal time which they wish to live to the fullest. And like most busy professionals,more often than not money management seems to come at the end of this wish list. Pilots go through meticulous preparation and planning for their flights daily but sometimes are unable to do so for their finances.

While money is not the end, it is definitely a means to achieve certain objectives. Proper planning and structure to a pilot’s personal finances can result in he/she being prepared for all kinds of life events and responsibilities. Events such as:

  1. Sudden Illness:The requirement for pilots to be medically fit is of prime importance as they are responsible for the lives of hundreds of passengers daily. Every pilot needs to ensure a good health cover to cover sudden illness and hospitalisation. A pilot may wonder why would he need insurance when he is already covered. But if one actually things about, it might be prudent to have a separate health insurance cover for times when you may not be employed or between jobs or in cases where employer insurance is inadequate.
  2. Need for upgradation of Skill Sets:Like all professions, skill updation is a critical requirement that must be met by all pilots on periodic basis. But these do not come at a cheap cost. Ensuring enough provision and funds are kept aside and is available at the time of requirement can go a long way in avoiding last minute stress.
  3. Contingency Needs: A major issue plaguing the aviation industry is the availability of opportunities. The last few years have clearly demonstrated that problems are plenty in the Indian aviation sectors. For eg. Airlines have closed down, pay cuts are becoming common, or there have been significant delays in salary payments. Such events can have huge financial implications on pilots and their families. Having contingency funds parked in highly liquid assets can help bring some normalcy in such difficult times.
  4. Retirement and Sunset Years:Insufficient planning for your golden years i.e. Retirement can cause stress. In case of pilots, who are among the top earners amongst professionals, this only magnifies the problem. Why so? Pilots more often than not tend to have busy lifestyles with high discretionary expenses. As such they are accustomed to a lifestyle that will only get more and more expensive as years pass This year on year rise in prices is called Inflation and it is an important factor that more often that not, is grossly underestimated. Furthermore, like any other busy professional, even pilots like to keep themselves occupied during retirement years. The interests or activities that they might pursue would also usually have financial implications. Activities such as investing into various ventures, pursuing hobbies or dream goals, continuing leisure flying by enrolling in the local flying club can be just some of the examples. To be able to fund these without affecting retirement corpus requires careful planning early on.

Take the case of pilot Mr. Sharma. Currently aged 30, the household expenses for him and his family is Rs. 12 lakhs per annum. Even if we assume a general inflation of 8%, the same Rs. 12 lakh will become Rs. 1.75 crores at the age of retirement at 65. ( Rules permit pilots to fly till the age of 65 ). In other words, Mr. Sharma would need to have a big enough corpus at retirement that will provide them atleast Rs 1.75 crores every year that will help them maintain current lifestyles.

Pilots are aware of the importance of planning. Each flight requires hours of pre flight preparation which means going through weather reports, system checks among other items to ensure that the flight goes by without any hitch. Similarly having a strategic plan in place for one’s finances can also help prepare for any “rough weather” that could come along in a pilot’s financial life.

 

 

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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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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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India equity markets celebrated Diwali in style, with the Nifty regaining the 8,000 mark and the Sensex moving above 27000.

There was plenty of positive news flow from India like the Government announcing a series of policy reforms including diesel deregulation, gas price hikes and e-auction of the cancelled coal blocks. The victory of the BJP in the Assembly elections in Maharashtra and Haryana too buoyed sentiments.

Equity:

Nifty increased by 1.02% whereas CNX Midcap increased by 1.44% during the month.

The Price to Equity ratios continues to show that equity market valuations are above 20 Year average and it is therefore critical to see earnings pick up to justify current valuations . Early signs show that it is starting to happen as you can from the chart below on both PAT and EBITDA margins for Nifty companies:

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Source: Motilal Oswal Research, 2014

In the graph below it is very clear that investment growth has picked up recently in India compared to some of the other emerging markets (like Brazil, Russia and Mexico), but needs to rise further for economic growth to improve structurally.

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Source: Morgan Stanley Research, October 2014

Global economic growth woes continued – the IMF downgraded its economic outlook on the globe due to weaker than expected global activity in the first half of 2014, along with ongoing Middle East tensions, the Ukrainian and Russian standoff, along with the Hong kong political unrest. The new epidemic disease Ebola is also a big concern in U.S, African and European countries. News from Europe also continues to be challenging. The US ended its bond buying program but maintained its stances on keeping interest rates low for a considerable period, in line with market expectations. Whilst it is very tempting to move to a 100% domestic portfolio in this environment, we continue to recommend to have at least 10% of the portfolio invested globally for the purpose of global diversification, as well as act as a hedge against currency risk.

With projections of GDP growth of 5.5 percent in FY 2014–15 and 6.5 percent in the following year, Q2 2014 GDP growth came at 5.7%, above the consensus expectations. We believe that the Indian economy is on the cusp of a growth uptrend and this will contribute to growth in corporate earnings as we have shown in our charts above in this article and hence will justify strong performance of Indian equities, especially with oil and commodity prices coming off. However, it is critical to keep you asset allocation intact.

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Source: MSCI, Credit Suisse, I/B/E/S, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management “Guide to the Markets – Asia.”

Fixed Income

CPI inflation eased to a series-low 6.5% in September 2014 from  7.8% in August 2014 in year-on-year (y-o-y) terms and Core-CPI inflation (excluding food, beverages & tobacco and fuel & light) declined significantly to a series-low of 5.9% in September 2014 from 6.9% in August 2014 (refer chart below)

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Source: CSO, ICRA Research

Inflation related to fuel & light moderated to 3.5% in September 2014 from 4.2% in August 2014 in y-o-y terms. Softening of prices of various commodities including crude oil and domestic fuel prices would benefit the CPI trajectory in the near term and hence we continue to expect the Reserve Bank of India’s (RBI) January 2015 target of restricting CPI inflation below 8.0% to be achieved.

Nevertheless, the probability of a Repo rate cut in 2014-15 remains low, as the RBI is likely to continue to focus on containing inflationary expectations to improve the likelihood of restricting CPI inflation below the January 2016 target of 6.0%.

The below chart shows the Interest rate differentials between US and India:

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Source: Axis Mutual Fund

There is a fear that higher US rates will draw FII money away from India. This is not borne out by history. During 2004-06 even with rate hikes money continued to flow into India from FIIs. Secondly, back in 2004 at the start of the cycle, US rates were at 1% and Indian rates were at 4.5% implying a 350 bps differential. By the end of the Fed rate hikes, the rates were respectively 5.25% and 6.50% implying a differential of just 125 bps. In contrast currently the US is close to zero (officially the overnight target is 0 to 0.25%), while RBI is at 8%, a differential of nearly 800 bps.

Hence, we recommend having the fixed income portion of the portfolio comprising of both accrual and duration strategies where accrual strategies will lock into current high interest rates and duration strategies will start benefitting once the interest rates start coming off over the next 12-24 months.

Gold:

Demand for Gold has seen a rebound in recent days in India and China. India celebrated Diwali, the biggest gold buying festival  which boosted physical demand for the yellow metal on support of low prices. Meanwhile, a surge in Gold imports pushed up the India’s trade deficit for September to $14.25 billion of which Gold imports accounts for $3.75 billion. This raises questions on whether there can be some quantitative restrictions or higher import duties put on gold , to bring down the demand. Hence, allocating only a smaller portion of your portfolio in Gold continues to be a prudent strategy.

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Meeting deadlines, adding value, juggling priorities, wearing different hats are a part and parcel of every entrepreneur’s life. Whilst there is a certain high that comes with all of this, it is also crucial for an entrepreneur to critically manage money, both for the business and himself/herself and dependents. Whilst efficient use of capital is one of the most crucial elements along the entire entrepreneurial journey, we believe there are two phases where managing money is absolutely critical. Money management during these two phases can go a long way in ensuring that the business can reach a stage where it is robust enough to survive, grow and flourish over longer periods.

Phase 1: Whilst you are planning to set up

Phase 2: In the first 18 -24 months of the business

Money management during both these phases can be fairly similar. Entrepreneurs still need to lead their personal lives, even as they go about building the blueprint for the business that is closest to their heart. With a significant number of entrepreneurs today quitting jobs to find their true calling, planning the capital requirements for their business, as well as to sustain their personal lives whilst positive cash flows from the businesses are yet, to happen are crucial. We would recommend that entrepreneurs focus differently on their personal and business finances.

Personal finances

1  Create a large contingency fund – Have 12 to 18 months of personal expenses ( including personal EMIs ) in financial instruments, wherein they can be accessed immediately, as well as have no significant risks of capital loss. Instruments like PPF and EPF accounts are not great friends of early entrepreneurs as access to funds in these accounts tend to be rather difficult and time consuming. Instruments like bank deposits and debt mutual funds without a lock-in are superior options during this phase. You may need to start drawing a small compensation during the latter part of this phase, so seek tax efficiency as well.

 2  Ensure that you are covered against risks in your personal life – Have adequate life insurance (buy term insurance as it is the most cost efficient) so that debts and living expenses of your family are adequately covered. Ensure that you have health insurance cover for your family and dependents in place for an adequate amount.

Business finances

1  Avoid risky investments with your business finances – Remember, the best returns over a period tend to come from your business so avoid other risky investments in this stage with funds which are needed for your business. For example, do not temporarily park funds into equity markets or real estate. At the same time, optimize your returns depending on your cash flow requirements, by building a tiered investment strategy. In case you cannot do this yourself, use the services of a financial planner. Liquid and debt funds can be very useful tools to consider.

 2  Focus on good costs, eliminate the bad costs -With a large number of businesses, getting started without external funding and needing to sustain using internally generated cashflows, it is crucial to keep costs under control. Look at costs as good costs and bad costs. Good costs are those that have a high probability of a success outcome, whereas bad costs are those with a low or no probability. This definition may vary from business to business, for example a swanky office may be a good cost in a consumer business, and a bad cost in a B2B model.

3  Use technology tools to the maximum – Through the use of mobile technology and the internet, it is now possible to manage your cash flows efficiently, with minimal commitment of your most precious resource during this phase i.e. entrepreneur’s time. Understand how you can use technology to manage cash flows and get superior returns on your temporarily idle cash in this phase.

Remember, whilst all rupees are equal, but some are more equal than others. More so, when you are a new entrepreneur.

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