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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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HR Post 1 (2)Consultancy is the new age choice of profession. And being a consultant is right there amongst the top dream jobs!

One of the most upcoming fields in this professional niche is in the sector of Human Resources. Consultants in this sphere are referred to as Human Resource Business Partners.

A Human Resource Business Partner goes beyond the regular functions of the organization’s HR team. As such, HR Business Partners generally tend to be very busy as they handle important head hunting and hiring mandates. With bigger mandates and responsibilities comes a much nicer pay package alas with no time to look at personal finances!

But like all professionals, Personal Financial Planning should infact be at the top of the priority list. Why you ask? Let’s delve into the reasons.

Time Restraint: Like all consultants are occupied 24/7, a HR Business Partner is always vying for personal time. And when they do find some, the last thing on their mind is personal financial matters. In the catch up for personal things to get done, personal finances are a low priority. Yet should it not be the complete opposite of this? The importance of financial planning is not just related to finding out how much to invest and where. Financial planning and giving a structure to overall finances is aimed to attain peace in the thought that despite all other commitments, you are working towards insuring that financially your dreams and aspirations will be taken care of. And that is a great source of calm for a person constantly on the move.

Contract based Income: As a consultant, you are a contractual worker in essence. In other words, you are in receipt of the handsome income only as long as you manage to keep the contracts alive. Shouldn’t simple logic dictate your actions that this hard earned should be channelized for situations when no contract is available? Or in layman’s terms, creating a Contingency Fund for those truly lull periods in the industry. Wouldn’t you want to make this hard earned money work as hard as you so that your dreams of an early retirement or that fancy foreign holiday come true?

Insurance: While you may have already thought of the regular health and life insurance policies, what is worth considering are additional risk covers in terms of Personal Accident and Critical Illness Policies. These provide features which help augment income in case you cannot report in to work due to major accidents. In addition insurance that is worth considering for senior HR Business partners or top executives of HR Consulting firms is the Keyman Insurance Policies. (More on all these in the subsequent posts.)

What is it that you truly fancy doing with your hard earned monies that you worked so relentlessly for? Would it not be nice to know that your efforts can be enough to fulfil your life dreams? Most likely your answer would be a resounding YES! So then, what is stopping you? Mere inertia? An inherent fear of doing something wrong that can’t be taken back? Lack of knowledge on how to go forward? The questions are many.

And yet, the solution might be as simple as the professional choice that you have made for yourself. Why not consult an expert consultant from the financial advisory field? It is after all why you are hired right? So why the hesistance in doing the same thing for your personal benefit.

As fellow consultants and advisors we believe, like you, that specialization leads to credibility and expertise. And like consultants, we understand that trust is only gained through repeatedly providing sound and quality advice. Being credible and trustworthy is essential, more so in matters of personal finance.

Having a word with a Financial Advisor to make certain your hard earned wealth is doing the right thing may be a good idea and most certainly worth your coveted personal time.

Till then…continue the good job of quality consulting!

 

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Sixth bi monthly RBI Monetary Policy FY17

The RBI monetary policy committee ( MPC ) reiterated what it has indicated in its last meeting in December – concerns around core inflation continue to remain with seasonal impacts on currently low inflation on items like vegetables likely to go away over a period of time, a strong global recovery that could create inflationary risks though higher prices of commodities including oil, volatility in global currencies on the back of rate hikes in some developed economies and some pass through of the HRA component of the 7th pay commission implementation.

Whilst none of this was really new, there continues to be a view that what the MPC says and what they will do are different from each other. With two consecutive policies that have reiterated the same thing, we believe that markets will finally believe that the MPC means what they say, and their actions will be consistent with the same.

It is therefore critical to continue to remember that managing inflation in the 4-5% pa range continues to be the number one priority of the RBI , and therefore decisions are likely to be taken keeping this in mind, more than other data points.

Your investments

The RBI also moved its policy stance to ‘ neutral ‘ from ‘accommodative ‘ which possibly means that the interest rate cuts from its side are probably coming to an end. This may mean that investment strategies that were driven around interest rate cuts need to be pared down. However, we need to remember that a neutral policy does not mean that interest rates are going to go up on bonds and fixed income instruments, so there is no need for a complete change in investment strategy on fixed income side. A strong global recovery as indicated in the policy statement ,is actually excellent news for the Indian economy, as a global growth environment has traditionally been positive for Indian companies, and therefore one should expect corporate earnings to get better going forward. The MPC has also indicated that they expect the economy to start showing a recovery going forward, so investments in equities could be enhanced for longer term investors. One also needs to remember that even thought RBI has probably stopped cutting interest rates, banks would possibly continue to cut loan rates as the transmission of the 1.75% rate cuts have only been about 0.85% to 0.9%, meaning that corporate India could continue to see lower loan rates going forward, helping their bottomline.

Your loans

With the banking sector flush with funds, and transmission only partially done, you can expect to see loan rates continue to drop for individual borrowers as well. It is a good time to refinance your loans, especially your home loan, in case you have not done so already. Be choosy about the loan provider that you use, as different variants of loans available could mean that you need to pick what works best for you.

April 6 is the next date to watch for the MPC meeting – expect some volatility in bond and currency markets till then, as they react to this shift to a neutral stance as well as other global events.

 

 

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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.

MPC pic

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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PNB  Housing Finance is the 5th largest Housing Finance Company by loan portfolio as of 30 Sep 2016. They offer loans for purchase, construction, extension or improvement of residential properties or plots, Non housing loans in the form of Loan Against Property (LAP), loan for construction of Non Residential premises and general purpose loans to developers for on-going projects.

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Data Source: JM Financial

Post issue the share of PNB will reduce to 39% from 51% at present. In case of Destimoney, which took 49% stake in 2009, the stake will reduce to 38%.

Strengths

  1. Strong distribution network:

Their business is spread across Southern, Western and Northern regions of India. As on31 st March, 2016, 40% of their loan portfolio originated from the Northern region and ~30% each from western and Southern regions.

  1. Stable operating model and centralised operational structure:

Their processing hub is designed to support additional branches which will enable them to deepen penetration. Their branches, processing hubs provide centralised and standardised back end and administrative activities, payments and processing of their business. This enables timely collection of funds, better fund management and proactive alerts to their collection department in the event of an overdue.

  1. Diversified and cost effective funding source:

As on 31 Mar, 2016 their lenders include 22 public and private sector banks, 17 mutual funds, 16 insurance companies, 553 Provident funds and 122 pension funds. This has resulted in an overall low cost of borrowing and allowed them to maintain sufficient interest margins.

  1. Prudent credit underwriting, monitoring and collection process

This has helped them maintain growth in the loan portfolio without compromising on credit quality. They have a credit appraisal team of experienced professionals who perform credit checks to minimise losses. They also have subject matter experts in several areas of underwriting, legal, technical valuation and collections.

Risk factors

  1. If they are unable to manage the growth of their loan portfolio effectively it will impact their business
  2. Interest rate volatility may impact their business performance
  3. They face risk of default and non-payment by customers, in particular self-employed customers, who constitute 23.76% of their total loan portfolio as on 31 Mar 2016 due to factors like change in interest rates, regulations or other factors impacting macroeconomic or global environment.
  4. Due to increased competition and deregulation of interest rates, housing loans are becoming standardised and lower processing fees and monthly reset options are becoming increasingly popular decreasing spreads.

Valuation

Peer Comparison

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The Price to Book ratios look reasonable compared to peers.

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Data Source: DRHP

There have been stable Net Interest Margins, reducing cost to income ratios and decreasing gross NPAs to total loan portfolio which is positive.

Our opinion: Subscribe for the long term

Its reasonable valuations, strong loan growth and strong distribution network are key factors. However, already existing competition could be a challenge. Investors with long investment horizon can subscribe to this issue as projects like ‘smart cities’ and ‘Housing for all by 2020’ may positively contribute to growth of PNB hosing Finance.

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In its first Policy the Monetary Policy Committee (MPC) headed by newly appointed RBI Governor Urjit Patel cut policy rates by 0.25% taking repo rates down to 6.25%. The way rates are decided is different from what it was before. It is now a 6 member committee which decides rates instead of the Governor alone. The MPC was unanimous in their decision to reduce interest rates by 0.25% today.

MPC pic

Focus on the real rate of return

With interest rates falling, there is a tendency to want to take more risk on the portfolio to achieve a higher absolute rate of return. We think that it is critical that investors focus on real rates of return ie the return after inflation on their portfolios. RBI continues to want to keep real rates of return between 1.25% and 1.5%, which makes fixed income attractive, even if you generate a lower return that what you generated a few years ago. Avoid higher risk strategies in chasing a higher rate of return in the current environment.

Your Investments

The rate cut came largely on the back of improved inflation numbers close to 5% in August compared to close to 6% in the month of July. Whilst food inflation, which was a big driver of inflationary pressures, seems to have come off very sharply, there continue to be risks of higher inflation due to the impact of the Goods and Services Tax (GST) post the announcement of the GST rates by the GST Council, the Seventh pay commission and the merger of the railway budget and the Union Budget which could impact the fiscal deficit by 0.15 to 0.25%. With an inflation target of of 4% +/-2%, the inflation numbers seem to be well under control at this point. The bond and equity markets had already priced in this 0.25% rate cut and thus they did not react aggressively to this announcement. Thus, whilst there continues to be a 0.25% rate cut possibility from here onwards, the timing of the same will be driven by other data, including what happens globally with interest rates. With growth rates continuing to become healthier in India, equity markets may continue to hold up in spite of their premium valuations at this point, as earnings could continue to be supported by lower interest costs. Therefore, the strategy would be to use a combination of domestic and US equity along with bond funds, with the bond fund exposure being weighted more towards accrual and short term strategies, and less towards duration and dynamic strategies. On the liquidity front RBI policy remains accommodative and nothing has changed on that front.

Your Loans

The loan rates get decided by Marginal Cost of funds based Lending Rate (MCLR). The transmission that has happened is lower than what everyone had expected. Therefore on the loan side you could continue to expect some relief, though it may be lower than what is expected.

Way Forward

The December policy will, to some extent, depend on the data flow and market expectations of the US Federal Reserve decision on hiking interest rates or not. Let us watch for the next RBI policy on 6 December 2016.

Image Credits: www.canstockphoto.com

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