DSIJ Interview with,R K Chandiok Director (Finance), National Fertilizers Ltd.
R K Chandiok
Director (Finance), National Fertilizers Ltd.
"CFOs go beyond their role and bring strategic thinking into play"
As a Director (Finance) of National Fertilizers Ltd, can you please elaborate on your top three priorities during the next three years?
As a Director (Finance), my priority area shall be to arrange funds for both short term working capital requirements for daily operations and long term loan requirements for various energy reduction schemes and other ongoing capex schemes for upgradation of electrical and instrumentation systems, information technology, i.e., implementation of ERP, etc.. It will be my endeavor to arrange funds by negotiating better terms and lower interest rate. For management of working capital requirement and associated costs, the focus shall be to strengthen the system for timely submission of subsidy claims with Government of India (GoI), earliest realisation of subsidy claims, reduction in mismatch of cash flow and reduction in avoidable expenses. As the fertiliser industry is highly controlled industry and with the introduction of Direct Benefit Transfer (DBT), the timely release of subsidy by GoI will play an important factor in day-to-day working capital management. It shall be my priority and focus to arrange funds for the working capital requirement at cheaper rates so as to achieve cost reduction and cost savings through effective utilisation of resources to enhance the profitability and value of the company.
Can you highlight the strategic initiative which paid off well for your company during your tenure as a Director (Finance)? How did it help the company and also investors who have parked their money in your company's stocks?
For increasing the wealth of shareholders,recently a decision was taken to arrange funds for energy reduction schemes from a single large bank without hiring agency for undertaking debt arrangement and advisory services. It has saved the initial processing cost by Rs.5 crore and the negotiations with the bank has resulted in getting rupee term loan sanctioned (more than Rs.1000 crore) at a pricing almost at par with AAA rated companies. Previously, strategic decision taken was to restructure the existing external commercial borrowings (ECBs) with new ECB with reduced all-in cost and restructured repayment by back loading to match with the cash flow requirement/projections of the company leading to saving in the interest cost.
A strategic decision was taken to review and change the composition of short term borrowings through various instruments. A strategic position was taken to raise maximum funds through Commercial Papers (CPs) at a cheaper rate for three months and discharge/ repay them before the expiry the quarter. Generally, it is seen that the CPs cost higher if these are dated after the expiry of the quarter. The borrowing through the CPs was 30% in FY 2013-14 and increased to 94% in 2017-18. As a result, interest savings equivalent to 60 bps was achieved in FY18. It requires very efficient and close monitoring. NFL sparingly borrows short term loans/cash credit from banks limits which attract higher rate of interest. The bank limits are used for few days, i.e. till the old CPs are replaced with new CPs in the next quarter. The credit rating of the company was got reviewed and upgraded to reduce overall finance cost. The utilisation mix of cash credit facility, commercial papers and short terms loans, etc., was aligned to expected cash flows to reduce the overall cost of funding. A strategic decision has been taken and implemented to introduce Dealer Financing Scheme (e-DFS) to make available cheaper loan at interest rate of 8.80% p.a. to dealers as against their general borrowing rate of around 10% to 14% p.a. and will enable NFL to target saving of around Rs.3-4 crore.
Similarly through SBI, NFL introduced Vendor Financing Scheme (e-VFS) to enable vendors to get realised their invoice value before due date presently at 8.05% p.a. from SBI. It will result in lowering interest cost to NFL as credit period of vendors has been increased and expected to save interest cost of Rs.1.50 crore to Rs.2.00 crore on per annum basis.
Inter Corporate Deposit (ICD) Scheme was developed after pursuing with many PSUs for availing short term funds at a lower rate of interest as compared to STL/ CC etc. At times, ICDs were raised at per/ lower rate than overall CP cost.
In addition, various steps taken to reduce interest cost such as increasing credit period of gas suppliers (expected to lower interest cost by Rs.8 crore), payment of invoices only on due dates and introduction of Tripartite Facilitation Arrangement between bank, supplier and NFL for timely payment of dues on due date in lieu of stand by LC arrangement at very competitive bank charges as against costlier LC charges saving of Rs.50 lakhs. In addition, to improve profitability, NFL is also taking action to monetise various idle assets of the company and unlocking the potential income. In this regard, leasing of school buildings, land for gas station, piped gas, petrol pumps, etc. have been undertaken.
The policy for investment of surplus funds was also reviewed and revised for optimising the return by investing strategically in FDs with public and private sector banks and mutual funds within the guidelines.
As a CFO what are the key challenges faced by you in achieving the company's objectives? How did you really overcome it?
The fertiliser industry is highly regulated and controlled industry and as such the objectives of the company can be achieved through timely availability of the finance for meeting the short term as well as long term requirements of the company. In the scenario of budget constraints with GoI for release of subsidy and challenges of recently introduced DBT system, the full year subsidy is not released in time leading to resorting of working capital arrangement to meet the day-to-day requirement for sustained operations of the manufacturing company. The challenge is to arrange rupee funding for higher import of DAP/ MOP/NPK etc. as against buyers/ suppliers credit. In addition, arranging timely funds for capex (equity portion) will require excellent management of liquidity. Thus, in a controlled industry where the profit margins are fixed and are eaten up by under-recoveries under the subsidy regime, cost control and cost savings are essentially required to maintain healthy profitability levels.
The timely availability of finance and at a lower cost improves the profitability of the company and as such holistic approach was adopted to achieve reduction in the finance cost. The change in the mix of instruments by using higher volume of cheaper CPs, availing higher credit period from suppliers, used MIBOR/CD-linked loans as against MCLR-linked loans, negotiated lower rate with existing banks, adding new banks with lower rates, insisted terms for repayment of loan without prepayment premium/penalty yielded saving in finance cost to NFL. Most importantly, after lot of persuasion with DOF and DEA, Special Banking Facility (short term loan) was got implemented for all urea manufacturers at a cheaper interest cost of 1.75% p.a to the company, pending release of subsidy for want of budget by GoI.
In appreciation of achievements, I bagged "Winner - CA Distinguished Achiever – Public Sector Undertaking Award" by Institute of Chartered Accountants of India in January 2018.
What are the long terms plans to maximise the wealth of the shareholders?
In the long term, action has been initiated during the last two/three years to increase the production and sale of industrial products such as nitric acid (54% and 60% concentration), ammonium nitrate, sodium nitrate/nitrite, etc., to increase the trading volumes of imported fertilisers (DAP, MOP and AS etc.) multifold and leverage the strengths of vast marketing set up, dealers' network and experienced highly motivated marketing team. In other words, the share of non-urea business which is having better potential for profits, is being increased. As a result of constant efforts, the urea versus non-urea business ratio has been changed from 99:1 to 88:12.
CMD Manoj Mishra and board of directors have played key role in making NFL a multi-product company under the Kisanbrand, implementation of the various energy reduction schemes at all the units and diversification in trading activities. Thus, with implementation of energy reduction schemes and focus on reducing the finance cost, NFL is expected to achieve better results leading to increase in the wealth of shareholders.
CFOs are believed to be people who only understand numbers. What needs to be done to ensure CFOs in India get their dues?
CEOs are the face of the company and providing leadership for growth of the company, whereas DFs understand the numbers as well as the meaning and requirement of the overall corporate objectives as well. For this purpose, they go beyond their role and bring strategic thinking into play by understanding the dynamics of products market and financial market so as to increase overall market share of the company without losing the margins.
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