The Hindu Business Line : Go beyond financial analysis

Can reassurance be infused into the economy and the financial markets by mandating an additional set of disclosures in reporting by companies and financial institutions? "Though our reporting structure is amongst the best in the world, the realty sector's reporting and accounting practices need more crystallisation," says Mr V. R. Srinivasan, Director & CEO, Brics Securities Ltd, Mumbai (www.bricssecurities.com).

Lot of our worries currently are imported, he adds. "Our focus should be continuation of planned spending on infrastructure and a clear message at the policy level that infrastructure spends will continue as before. This should encourage corporates to plan for growth ahead and should bring long-term investors back to Indian shores," suggests Mr Srinivasan, during the course of a recent email interaction with Business Line.

Excerpts from the interview:

What can be the apt tools of financial analysis that can help investors during times like this when the markets heavily discount even companies that are fundamentally strong?

Before looking at the financial analysis, one needs to assess the ability of the management to steer during the turbulent times. Focus on discounted cash-flows, debt/equity, ROE, ROCE, asset turnover, based on sustainable growth assumptions help investors separate the wheat from the chaff. It is important to remember that in the short-term, the market is like a slot machine, but over the long-term, it's a weighing scale. The companies that come out stronger based on the aforesaid variables, should outperform over the medium- to long-term.

Compared to the better times that the M&A space had seen not long ago, do you think that the clinching factors are different now as regards deals?

Corporate focus in the near term is on maintaining and optimising what they own, and rightly so. Liquidity constraint and fear of demand destruction seem to be the top concerns. However, for conservative groups with low leverage and positive cash-flows, it is a good time to hunt for deals. The IT majors have already indicated that.

With the primary market almost drying up, and the overseas borrowing option continuing to be bleak, what can be the advisable options for companies looking for funds? Also, what should be the top concerns of the treasury chiefs in corporates?

For top corporates, domestic funding, at a price, is not an issue. Recently, RIL raised Rs 5,000 crore at 11.50 per cent. The problem is more for SMEs and sectors such as real estate and leveraged entities. This is an environment for `survival of the fittest'. The better thing for the beleaguered companies should be to look inward and weed out inefficiencies, and improve productivity. Also based on what's happening on the policy front in India, interest rates should level off in the near term. That should provide some respite.

Shouldn't CFOs be taking a hard look at their credit policies now? What metrics assume importance these days, on worksheets?

I think that has already started. Working capital efficiencies, that is, productivity, assumes importance, in a muted short-term growth outlook.

Would popular suggestions - such as that companies reduce price rather than production - be practicable?

Market forces will anyway determine these outcomes. Wherever excess capacity has been built up, pricing power will get affected.

How do you see the impact of the financial crisis and economic meltdown on SMEs?

It is a double whammy for SMEs. While their customers will postpone payments, their suppliers would insist on spot down. Banks will seek more collateral for sustaining existing limits.

Do you advise that promoters raise their stake, at the current low valuations?

Promoters who have the ability are already doing so (Godrej Consumer, for example). But on a moral level it is not advisable for promoters to take a call on their share price.

Is being a zero-debt company a comfort factor?

At this juncture, yes. But that surely is not a sign of out-performance over the long-term. After all, you have to optimise resources and look to grow. India is a long-term growth story and corporates that focus on leveraging their strengths would outperform over the long-term. Overleveraging is an extreme, so is zero-debt!

What, according to you, are the lead indicators of any reversal of the present swirl, internationally and on the domestic front?

Once global and domestic credit markets see the easing of liquidity, they should be back to fundamentals.

Your views on whether the currency markets require radical interventions.

In our view, there has to be stability on the exchange front. So if market forces cannot determine that, then intervention every now and then, is required.

We talk about financial inclusion, financial literacy and so on. Do you think that individuals would have responded differently to a crisis of current proportions, with a greater financial literacy? On a related note, do we need policies to ensure that the right players operate in financial market segments?

What we are witnessing is the combined effect of an earthquake and a tsunami; and I don't think people had the time to react to the situation. But in the long-term, policies should discourage direct participation of retail investments in the equity markets. If the hands of institutional investors are strengthened accountability from corporates will improve.

D. MURALI

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