COVER STORYBEST CFOS

The Reward in Risk

F
CFO/ L&T

ebruary, 2009: Prices of copper, a commodity that engineering and construction giant Larsen and Toubro (L&T) uses in abundance across a range of projects, are at a years low of $3,400 per tonne. Y.M. Deosthalee, Whole Time Director and CFO, L&T, decides its time to lock into long-term contracts at this price in large quantities totalling 6,000 tonnes. The total value of these contracts runs into a

Best in Treasury Management

Y.M. Deosthalee
Background: LLB & Chartered Accountant; Rose from GM (Finance) in 1990 to Sr. VP five years later with a board position. Has been CFO since November 2001. Winning move in 2008-09: Hedged foreign currency loans well in time, which would otherwise have meant provisioning Rs 1,500 crore at the peak of crisis. Challenge Ahead: To prepare for and manage peaks and troughs in an economy over the lifecycle of a company. Most likely to be heard saying: The basic purpose of a treasury is to not just churn out profits but also manage risk effectively and protect margins.

NISHIKANT GAMRE/www.indiatodayimages.com

64 BUSINESS TODAY May 2 2010

few billion dollars. That move helped us make some big costsavings, grins the 63-year-old CFO. Reason: Prices of copper today have shot up to $8,000 per tonne. Thats just one of the countless shrewd decisions made by Deosthalee over the years. And it fits well with his credo that treasury management isnt just about churning out profits, but its also about managing risk effectively and protecting business margins. A.M. Naik, Chairman and Managing Director of L&T, says,Risk management is all about striking an optimal balance between competitiveness and profitability. Few corporate treasuries can hold a candle to that of L&T in terms of sophistication and complexitythe treasury of Mukesh Ambani's Reliance Industries would be one notable exceptionas it goes about managing risk across currencies and commodities. For the man who joined L&T some three-and-a-half decades back, the one constant has been the new challenges. When executing billion-dollar projects in sectors that range from power to hydrocarbons, the company has to deal in at least a dozen commodities (which serve as inputs) and a web of currencies (in which it borrows or is paid in for turnkey projects). The biggest challenge is to budget for a project in terms of costs and expected revenues 3-5 years after the bidding is done, says Deosthalee. Any one decision gone awry has the potential to shrink margins and pile up mark-to-market losses. Deosthalee and his team have got it right most of the time. Like when L & T shifted from an open position in a yen-denominated borrowing to completely hedging it.

position to hunt for acquisitions (it It was in July 2007 that the treasury went after Satyam but that it didnt guys spotted a very erratic pattern of bag it is another matter). We were the yen appreciating against the US dollarin sharp conrast to the trend able to look at things much more that prevailed for years of a optimistically in an environment in depreciating yen. Larsen and which many others were struggling Toubro, like many domestic and to stay afloat, says Deosthalee. In global companies, had a bulk of its fact, L&T was able to invest its surplus funds in good quality paper as the borrowing in yenequivalent to yield went up to 11.5-12 per cent $1 billionbecause of the rockfor 10-year paper. bottom interest rates in Deosthalee says: In the Japanese economy. 2008-09, we generThere was no point in ated an average return remaining open (once Build up liquidity in of almost 14.5 per the yen started apprecthe good times. cent. Its investment iating), recalls Deostportfolio in governhalee. So a decision was Budget costs and ment securities, corpotaken to hedge the ex- revenues for projects rate bonds, mutual posure fully by August with a gestation period, funds and equity today 2007 between 117 and right from bidding to stands at Rs 8,000122 yen per dollar execution. 10,000 crore. compared to 94 yen to Learn lessons from Deosthalee has day. Similarly, forex topnotch global institualso gone about builloans of $1 billion were tions on how to manage ding a solid team in his hedged during March growth (in boom times 45-member treasury. and April 2008 beand during downturns). Hes assisted by 46tween $40 and 40.50. year-old Govindan If L&T had not hedged the yen exposure, the mark-to-marRamaswamy, General Manager ket losses could have run into thou(Corporate Finance) at L&T who, come May, will head to General Electrics sands of crores. headquarters in New Yorks Fairfield. Another example of timely risk The idea is to understand how they management: Today, the entire manage growth at the peak and liabilities of L&T are on a fixed interest basis with interest cost in the when in a trough, says a beaming range of 4-5 per cent. This was Govindan, who is hoping to get lucky locked much in advance when the and meet GE CFO Keith Sherin. Govindans first-of-its-kind company saw oil and commodity expedition is part of a larger treasury prices beginning to rise. programme in which L&T plans to Back in 2007, much before the engage itself with high-quality onset of the global crisis, the engiglobal institutions that have survived neering giant was busy building up for over 100 years. Thats one way the liquidity. It even made a Global to become a high-quality global Depositary Reciept issue in 2007. institution with topnotch risk So when the recession hit, L&T was flush with liquidity, and actually in a management systems.

CFO MANTRAS

Risk management is all about striking an optimal balance between competitiveness and profitability
A.M. Naik/ Chairman and MD/ Larsen & Toubro

May 2 2010 BUSINESS TODAY 65

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