BREAKTHRU ENTERPRISE VALUE CREATION FOR STAKE HOLDERS

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BREAKTHRU ENTERPRISE VALUE CREATION FOR STAKE
HOLDERS
The New Competitive Advantage Mantras
Through Strategic Financial Initiatives and
best Corporate Treasury Practices (With
Corporate Case Study) B R JAJU Director and
CFO Welspun Corp IMC-Mumbai, Oct 11,2013
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Steroids
Conventional Way of Managing Business
/Finance No Ethical practices Growth
Strategy IT iIlusion

Dying Corporates on Steroids

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2/11/2015
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Let us take deep dive

• Changing business landscaping India
  perspective with global paradigms New age CFO
  challanges
• Value propositions Enhance enterprise value and
  strategy map
• Moving into new orbits Preparing for renewed
  growth thru best financial practices
• Business growth strategies MA and key concerns
• Corporate Case Study trigger for learnings
• Parting thoughts and key take aways

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• Changing business landscaping (India
  perspective with global paradigms)

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Global Dynamics Indias perspective
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How Global Corporates have destroyed values
Key learnings
Emerging Technologies Changing Customer
Tastes Conflicting Interests/Frauds
Self Denial
Exceptional Achieve of Past wraps present
realities Nobody can duplicate your products You
are smarter than others
Arrogance (Pride before fall)
Past Success under regulated monopoly U were
chosen for success by govt U are run with Govt.
control
Complacency
Justify every financial norms for growth and
unearned profits Achieve growth devoid of
business fundamentals Overleveraging and over
trading on equity
Greed Obsession
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Let us look at Corporate value destroyers

• Corporate Scandal Jobs Lost Shareholders
• wealth lost bln)
• Enron Created off B/S exposures
• to hide debts losses 4500 80
• Xerox Impropriety reports 6.5
• bln. In revenue (over 5 years) 13600 3
• Worldcom Hidden expenses ( 3.9 bln)
• to raise bottom line 17000 100
• Merck Over 14 bln revenue reported
• for many years, never collected NA 43
• Quest.com Inflated revenue thru equip.
• sales / Swaps 11000 33
• And list goes on.

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New Age Finance Leadership Core concerns and
Challenges

• Competencies Challenges
• Understanding of how money (or value is made) or
  lost in business (value chain competencies)
• Appreciation of the concept of risk (risk
  competencies)
• Perspective on expectations of different
  stakeholders (stakeholders expectations
  competencies)
• Regulatory compliances
• Performance measurement

AS STRATEGIC GUARDIAN OF THE ECONOMIC VALUES OF
AN ENTERPRISE
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NEW AGE CFO_KEY DIFFERENTIATORS

• Be a key enabler in
• Drive growth
• Profitability Product Consumer
• Cost Control
• Customer analysis
• Internal controls
• Function/ Business partnership
• Asset management F/A, Working capital (focus on
  inventory, receivables), Cash
• Corporate Governance.
• Risk Management
• Efficient transaction processing/ reporting Co.
  Financial to stakeholders
• People development
• Uphold Company Values create an environment of
  trust reliance

Moving into New Orbits
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• Value propositions
• Enhance enterprise value and strategy map

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Radical Performance Improvement is possible
High performance companies exist even in the
so-called unattractive industries.
It requires mindset and willingness to benchmark,
not against the average or the comparable, but
against the best and draw both inspiration and
learning form those benchmarks to drive oneself
forward.
L. N. Mittal
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Revolutionary Balance Sheet To Capture True
Enterprise Value
Assets
Liabilities

• Off Balance Sheet Liabilities
• LD/TP Claims
• Tax /Legal Disputes
• BG/CG Impact
• Indirect borrowings
• Commitment Failures
• Volatility -Forex /Commodity/Int.t

• Op. cash gen./FCF
• Performing Assets
• Sales Growth
• New Product/Market/ Customers
• Order Book-Visibility/
• Profitability

TANGIBLE

• Credit Rating
• CustomerS Vendors-In pipeline
• Empowered HR resources
• Business Intelligence
• Brand Building -IPR
• New Products in Pipeline
• cutting Edge Technology

INTANGIBLE

• Financial Reputaion

• Bad Publicity
• Employee Disengagement
• Customer mistrust.
• Integration Failure -post M A

Enterprise Value NW Debt Payable Additional
Value of Above Net Assets
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Enterprise Value Assets driving success
A companys Assets
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BUILDING BLOCKS TOWARDS GENERATING FCF
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Business Transformation- Major Enablers
Pillars. (to enhance enterprise value)
Business Drivers
Ethical practices Governance
Reduce Cost of Capital
Divest / Hive off (NPB/NPA)
Operating Excellence
Long term value creation
Cost Competitiveness
Reliable Operation
Organization Capability
Throughput Improvement
Revenue Growth
Engaged Employees
Technology Up-gradation
Customer Focus
Manpower Productivity
Working Capital Management
Innovations
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A Strategy Map towards Transformational Value
Creation
Productivity Strategy
Growth Strategy
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ENHANCING STAKEHOLDERS VALUE - VALUE CHAIN
SOCIO ECONOMIC ENVIRONMENT
Critical Resources (X)
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Moving into new orbits-Financial Innovations

• Preparing for renewed growth thru best
  financial practices

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S T R A T E G I C I M P E R A T I V E S

• Grow the volumes aggressively
• Manage the net realisations judiciously
• Control the costs / Eliminate the wastages
  ruthlessly
• Sweat the assets relentlessly

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Cash is King-Increasing Cash Conversion
Under Utilized Assets
Intelligent Capital Allocation
Working Capital Management

• Surplus property
• - Disposal of surplus / empty properties
• Tail brands
• - Disposal of non-core / declining brands
• - Reduces management distraction.

• Invest right amount of Capex in the right places
• Capital to be allocated to attractive and
  strategic projects.
• Capital will become more difficult to get but
  not under invest in the business.
• Monitor Payback and assets turn.

• Trade working Capital
• Days Net Working
• Capital
• Align with Peers

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Making Balance Sheet strong and leverageble

• Fixed assets, own or outsource ? to create value
  and improve asset turn
• Goodwill, ? to enhance growth thru brand value
  and improve ROIC
• Working Capital, ? drive down the working
  capital to build operating efficiency
• Investments ? ensure safety of investments and
  optimize returns post tax and action plan to
  minimize risks.
• Cash, ? reduce the idle cash in the business to
  improve operating efficiency

Physical verification of assets, valuation of
inventories, confirmation of balances, valuation
of investment for market value thru expert
valuers is critical. Mandate going concern,
Prudence and Consistency principles to protect
the shareholders interest and value of business.

• Loans ? take care of liability by repaying in
  time principal interest
• Reserve and Surplus ? leverage the strength of
  capital to raise funds to build and
  grow the business
• Share Capital ? critical to drive ownership,
  voting rights, decision making and control of
  business

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FINANCIAL SUPPLY CHAIN AN INTEGRATED PROCESS
OF EFFECTIVE FINANCIAL MANAGEMENT
Financial Supply Chain Management is an
integrated approach to Provide better visibility
and control over all cash-related
processes, better predictability of cash flow,
reduction of working capital, reduction of
operating expenses and end-to-end integration of
business processes
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Best Practices driving forces key
differentiators

• For Driving Efficiencies Enablers
  Differentiators

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Assess potential business risks /alarms

• Demand shortfall
• Competition
• MA integration
• Misaligned products
• Customer pricing pressure
• Loss of key customer
• Regulatory problems
• RD delays
• Supplier problems
• Cost over-runs

1. Accounting irregularities
2. Management ineffectiveness
3. Supply Chain
4. Macro-economic issues
5. Commodity price shift
6. Interest rates
7. Lawsuits
8. Natural disasters/ physical risk
9. Chance losses

• Losses by
• category of risk

Strategic 58
Operational 31
Financial 6
Hazard 5
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Risk Mitigation Process and Tools
Elimination
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GUIDING MANTRAS OF CORPORATE FINANCE NON
CONVENTIONAL TRENDS

• Reliable, complete, timely MIS to support
  business decisions.
• Benchmark financial performance against best
  among peer group/Industry. e.g. cost of funds,
  securitization, structure financing, treasury
  products mix of financing
• Focus on sustainability of business margins
  through efficient costing system, WC management,
  commodity/Forex hedges, ongoing MSR analysis and
  review of quality of order book (for potential LD
  margins analysis)
• Monitoring of free cash flow to avoid potential
  NPA sticky assets.
• Regulatory compliances adherence to corporate
  policies practices.
• Accurate budgetary forecast to predict WC
  requirements and secure growth financing well
  ahead of the needs.
• Drive accountability performance review
  supported by measurable metrics indicators.
• Target to run all major business processes with
  least human intervention have them IT enabled
  to ensure data integrity seamless processing of
  MIS.

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Measure Corporate Health-Diagnostic Tools
Operating Performance EBIDTA to Net Sales Assess sustainability of business margins if compared with past period / Competition. (MSR being vital driver)
Process Cost efficiency Process Cost (fixed) to Net Sales Process Cost (Variable) to Net Sales Reflect the trend and avenues for cost controls immediate actions (mostly are controllable costs)
TAX Tax (Current FBT) to Net Sales Reflect avenues for planning to bring down tax expenses
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2/11/2015
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Ideal Diagnosic Metrics of Corporate Health

• Balance Sheet Ratios
• Red Signal If Sales revenue continue to
  climb while these ratios show a decline (Scenario
  happens in fast growing company), you see serious
  problem after some time e.g. symptoms of debt
  trap, signs of near insolvency, diversion of
  Short term funds for Long term Obligations.

Current Ratio Current Assets Current Liabilities Measure ability to survive in a Short term financial crisis
Debt Equity Ratio Net Worth (Tangible) Total interest bearing Liabilities Measures the Companys ability to survive over Long term
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2/11/2015
BR JAJU Welspun Gujarat Stahl Rohren Ltd
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Ideal Diagnosic Metrics of Corporate Health

• Hybrid Ratios for Business performance - B / S
  PL
• Red Signal with increasing EBIDTA margins but
  decline in ROCE could signify idle capacity and
  no sweating of assets OR could be high
  generation of NPA / NEA or irregular Accounting
  of capitalisation (Enrons Case).

ROCE PBIT Net Capital employed To reflect profitability on Net Assets deployed
Inventory / Receivables Turnaround No of Days of Sales Reflect High Inventory / Receivables, and / or Unplanned uncontrolled material inward
RONW PAT (Def.Tax to add back) Tangible Net worth To reflect accretive / decretive returns to Shareholders funds
EVA NOPAT (WACC x C / E) Reflect if Organisation is creating economic value
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Ideal Diagnosic Metrics of Corporate Health

• Liquidity Ratios -
• Red Signal Depressed ratios could signal
  wrong or Stringent Accounting Treatments of
  non-cash charges. OR
• Bad Management of working Capital un-prudent
  Capex.

Free Cashflow (Operating) FCF (Net of increamental WC / Capex Tax) If to extent measure, future growth that can be supported leverage capabilities
Cash ROCE / RONW ROCE RONW adding Non-Cash Charges To reflect Management Performance Value Creation for shareholders in cash terms
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2/11/2015
BR JAJU Welspun Gujarat Stahl Rohren Ltd
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Best Financial Practices-Internal Controls
Control Techniques
Detective
Preventative
Corrective
Regular Internal audits External Audits
Reconciliation of inventory counts with
perpetual records Comparison of reported results
with plans budgets

• Segregation of duties - Authorization Matrix
• Business systems integrity and continuity
  controls
• Physical safeguard access restriction control
• (human, financial, physical information assets)
• Effective planning budgeting process

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Fundamental Value of the business could be viewed
as the sum of Current Operations Value (COV), and
Future Growth Value (FGV)
VA
Market Value
Future Growth Value
VA
VA
VA
VA
VA
VA
Current Operating Value
Focus on both Renewal of FGV through investments
for the future . Conversion of
opportunities into performance through
operational excellence
Current Operations Value (COV) represents the
"no-growth" value of the company
Future Growth Value (FGV) represents the
investors expectation of performance improvements
over and above the level of current operations
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Illustration Projections on future profitability
and value of RD investments and MA helped
management better understand the Value Gap to
be bridged for delivering the target shareholder
returns
Initial Value Gap
Identifed Value Gap
1.1bn
M A / Inorganic Growth
6.2bn
2.7bn
Value Gap
Talent Development (Global Leaders)
0.8bn
0.8bn
Value of RD pipeline / Technology
1.0bn
Value of growth in PAT
1.0bn
Value of growth in PAT
2.5bn
2.5bn
2.5bn
Value of sustaining existing PAT
Value of sustaining existing PAT
2008
2013
2013
This exercise helps management in a) better
understanding the Value Gap implications to
shareholders b) identifying/ crystallizing
avenues to bridge the gap
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Business growth strategies

• MA and key concerns (Focus on Cross Border
  Deals)

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Most Common Cross Border Transactions

• Export of Goods/ services - fuelled by
  BPO/Internet
• Setting up branch offices, subsidiaries
  manufacturing facilities
• Acquisitions abroad
• Raising funds thru foreign bourses/ ECBs, etc

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UNIQUE DRIVERS TO TRIGGER CROSSBORDER MA DEALS

• Consolidated mature domestic markets
• Do not offer sufficient opportunities to
  re-invest earnings
• Overcome entry Barriers
• - Ease entry into markets
• Access to local advantages
• - Regional diversification
• - Tax advantages
• - Access to local capital markets
• Betting on future technologies
• Increasing value chain width
• Regulatory changes

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KEY SUCCESS FACTORS MAJOR ENABLERS
Successful M A leads to Value Creation for
Stake Holders

• Acquisition involves making judicious choices
  between often
• conflicting priorities

• Strategic fit, friendly transaction, due
  diligence (Social, Economic and
• Legal) Complimentary Resources are key to
  Synergy

• Each acquisition has a strategic rational that
  must be embedded into the
• Integration Process

• Two stage Integration -
• Reap benefits of Low hanging fruits in short
  term
• Strategic Road map to achieve long term
  objectives

• Without a clear understanding of objectives and
  expectations the
• path of least resistance will be followed
  

• The best partner for marriage can become the
  most difficult spouse

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SYNERGIES/ OPTIONS- FOR SUCCESSFUL CROSS BORDER
DELS -

• Cost Synergies
• RD, procurement, manufacturing, selling
  marketing, distribution Administration
• Revenue Synergies
• - New cross selling
• Pricing power market share
• Increasing each product peak level sales
  extending products life and adding new products
• Evaluating Quality of synergy Estimates
• Sources of synergies - higher margins, increased
  capital efficiency, high growth lower cost of
  capital
• Alternatives to Acquisition
• - Joint ventures Alliances
• - Organic Brownfield Expansions

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INTEGRATION STRATEGY

• Objective
• - To create multinational centered around
• the principle of performance orientation
• Guiding Principles
• - Values
• - Synergies
• - Respect of Talent

High
Degree of Change in both Companies Culture and
Practices
Low
Integration Challenge Shareholders value
Addition
Low
High
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INTEGRATION CHALLAENGE KEY TO SUCCESS OF CROSS
BORDER MA DEALS
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Valuation Challange
Once identification has been completed, the
process of valuing the target begins. A variety
of valuation techniques are widely used in global
business today, each with its relative merits

• Assets Based Valuations
• Business Multiples - EV/ EBITDA, EV/ Turnover, PE
  (EPS)
• Quicker and simpler
• Equity markets use it to judge the deals
• DCF Analysis
• Allows for rigorous analysis
• Key sensitivities can be evaluated
• Additional cash flow due to synergies arising in
  case of mergers

A Business is worth what someone is prepared to
pay for it !
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Deal structuring

• Financing
• Debt Equity ratio bases on industry benchmarks,
  profitability, bankability
• Bridge loan, Mezzanine/Subordinated Debt,
  Overseas ECB, FCCBs etc
• Share exchange, part cash and part share
• Management Control
• Shareholder Agreement RoFR, Anti dilution, Drag
  along, Tag along rights, deadlock provisions,
  Board representation (in JVs, PE investment)
• Indemnities for known risks, brand transfer etc.
  in the Agreement
• Forming an SPV
• Tax implications in different jurisdictions on
  dividend, interest income, capital gain,
  operating income, etc
• Mauritius (incorporation status GBC I GBC II
  differ in tax benefits) , DTAA
• Singapore (DTAA FTAs, tax incentives in
  shipping)
• British Virgin Islands (negligible taxes)

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• Case Study on MA and Structuring the Financial
  options

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Tata Corus Merger

• Deal
• 100 stake in the Corus group in all cash deal,
  valued at USD 12.94 Bn.
• One of the largest Indian takeover of a foreign
  company

• Acquirer TATA Steel
• 56th largest Indias 2nd largest steel company
• Lowest cost steel producers

• Target - Corus
• 2nd largest steel producer in Europe. 10th
  largest in the world

• Rationale
• Combined entity - 5th largest producer of steel
  from 56th position of TATA
• Would have taken several years for Tatas to
  build would an enterprise of a size of Corus
• Acquisition to provide significant presence in
  Europe

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Tata Corus Merger-Financing structure
Equity of 4.1 Bn.

• Methodology
• SPVs were floated in UK under the name Tata
  Steel UK. Tulip SPV Holdings (1,2,3) which were
  ultimately held by a Singapore SPV
• Tata Steel alongwith the SPVs incorporated in
  Singapore and UK raised the requisite debt of
  USD 8.8 bn constituting 68 of the total
  acquisition value of USD 12.94 bn.
• Debt was proposed to be pushed in each
  subsequent subsidiary and ultimately the same was
  infused as equity in Corus.

TATA Steel India
100
Singapore Co
Debt
100
Equity of 4.1 bn, Quasi equity of 1.25 bn
Bridge loan of 1.41 b
UK Co 1
Debt
100
UK Co 2
Debt
100
UK Co 3
Debt
100
TATA Steel UK
Corus
Acquired Corus out of 6.76 bn received from SPVs
long term debt of 6.14 bn from consortium of
bank
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Tata Corus Merger-Finacing rational

• Tata Steel acquired Corus for 12.94 bn
• Equity Contribution of 4.14 bn
• Borrowings of 8.80 bn through subsidiaries
• Tax consolidation in UK, tax shield on interest
  available to Corus
• Debt-equity ratio of funding is 6832 as Tata
  Steel UK could not have raised so much of loan
  due to strict UK regulations Thin
  Capitalisation norms for tax
• Corus paid loan out of its own cash flows and
  eliminated the tax to be paid on the dividend
  received from Corus

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A CORPORATE CASE STUDY - ON STRATEGIC FINANCIAL
INITIATIVES FOR VALUE CREATION
JOURNEY TOWARDS EXCELLENCE - Encountering
Challenges amidst Survival risks and Emerging
Business paradigms
Achieved financial operational turnaround
through innovative practices disciplines
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COMPANY OVERVIEW

• Global footprint with inorganic growth
• - Revenue USD 2bln. employee
  strength of 7500
• - Manufacturing facilities in 10
  countries across the globe

• Technological Leading player in global T D
  business
• Strong Brand Equity
• Professionally managed company
• Strong Quality Management Systems
• Value based Corporate Governance practices
• High commitment to Corporate Social
  Responsibility
• High value Corporate Initiatives
• Recognition for excellence in manufacturing,
  exports, safety, innovations

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FINANCIAL HEALTH RECOVERED THROUGH
IMPLEMENTATION OF BENCHMARKED GLOBAL STRATEGIES
Introduction of tough measures have helped
re-direct the corporate focus from survival to
sustainable growth
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GLOBAL STRATEGY-CROS BORDER ACQUISITIONS STEADY
FLOW OF POWER PROSPERITY
4th acquisition in may08 headquartered in France

• 1st acquisition in May 2005
• with manufacturing site at
• Belgium
• Ireland
• USA
• Canada
• Indonesia

5th acquisition in oct.2008 in USA
Companys transformation from its economic
turmoil to a model of wealth creation captivates
overseas aspirants to join the ranks
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Value Creation Approach Strategy Three Phases
5 Values -Performance Excellence -Leading Edge
Knowledge -Nurturance -Customer
Orientation -Intellectual Honesty

Phases

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HOW FINANCIAL INNOVATIONS AND GLOBAL
STRATEGIES HAVE TRANSFORMED COMPANY FINANCIAL
HEALTH -
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SUCCESSFUL TRANSFORMATION OF INDIAN MNC
USD mlns
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BUSINESS TRANSFORMATION ACHIEVED THROUGH
INNOVATIVE FINANCIAL INITIATIVES
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STEADILY ADDING VALUE TO STAKEHOLDERS
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PARTING THOUGHTS

• Enabling Deliverables Towards Breakthru
  Financial Transformation
• Acceptance of inalienable rights of shareholders
  as the true owners of the company .
• Commitment to values ethical business conduct.
• Be Innovative for capital efficiancy
  profitable growth mind set
• Integrate with business objective
• Maximize revenue thru derisking business model.
• Create enhance long term shareholders value.

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New Age Financial Management- FOR ADMIRED GLOBAL
CORPORATES A VISUAL
New Age Leadership
INNOVATION/TECK DRIVEN EFFECTIVE
GOVERNANCE SPEED COMPLIANCE
AUTHORITIES STAKEHOLDERS
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