How chartered accountants can lead the business

This post is a transcript(non verbatim) on best efforts basis of the webcast available at (http://spotforge.net/live/icai300812/). Copyright not claimed-I guess it vests with ICAI. Please do not quote without approval from ICAI and the speaker.  The talk was by CA. Sunil O. Khandelwal,Chief Financial Officer, Alok Industries Limited. He is also Chairman, CMII. The topic of the webcast was  Skills of CA- CFO  CA- CEO ;  CA- Entrepreneur. He has 23 years of experience in the same company(Alok) and has grown to become CFO, yet humbly says that does not claim to have learnt his job fully. Without much ado, let us read the tips below. Caution they said is 2hrs training will not make someone a CEO/CFO etc(not even management books do so!), but guidance on what to imbibe.

1. Charming Futuristic Optimistic(CFO)-if CFO does not have a smile on face giving confidence to top management and others, while working on problems in mind. Ideally, crisis should come and go without people getting alarmed, don't show off-true quality of CFO is to give comfort, act on time.
2. Caring for organization/Company's full ownership-feel as if you are the owner of the company-give your 100% commitment. Leadership is the 'mindset' not the designation. Organization always watches you how sincere/committed you are, then only advances you.
3. First few years of the career should go to build your knowledge base/understanding of the company. He has 23 years of experience in the same company, and everyday learns something new/new way of doing the same company like raising funds etc.
4. What is finance-some feel nothing but giving projections about the company-revenue/profits/cash flows. But unless you know the ABCD of balance sheet/critical aspects, how will you project it? So do not resist doing job of accountant. Don't be hurry to become CEO/CFO on Day1. Take whatever comes your way, show your capability by being meticulous and giving suggestions on controlling cost/areas of improvement, by using your knowledge of the company.
5. CFO should be champion of Finance Operations-oath to organization that I will meet all the financial obligations of organization in time and at lowest cost.
6.  He learnt and grew along with the company for IPO/project finance/QIP/overseas M&A/FCCB  etc, but still feels he has a long way to go in learning. Accountant(first 4-5yrs), then taxation/finance/audit role expanded, then as company grew scope shifted to raising finance. As the company grew, they further began to specialize, so delegation is the new skillset needed.Job of leader create everyone in organization capable of becoming CFO.
7. Championing Financial Information and compliance-setting up SAP/Oracle, accounting systems etc. When asked about SAP implementation, he said that his only decision was deciding to go ahead with SAP, and praised his implementation team for doing it seamlessly[he did not even need to get involved hands on].
8. One of the major job of CFO is ensuring covenants met on time. Also, interacting with equity research/bankers and keeping them updated about the company. CFO represents company to all stakeholders-bank, auditors, consultants, media, investors, Govt, internal, public at large, and therefore strong hand in communications/marketing/website. 
9. The definition of CFO that he has learnt in the last one year is Champion of Full Operations of the Company. Not only having full knowledge of operations but also getting Contribution From Operations. Hence, not only monitoring/review system but also making it profitable using our financial acumen/knowledge. Focus of production guy is quality products, marketing is what sells but CFO focus is truly finance/costs and can advice functions accordingly. Also, not only raising working capital for the company but also reducing working capital cycle/ensuring that it is effectively used.
10. Ensure FCF(Free Cash Flow=Cash Flow from Operations-Working Capital Increase-Capex) positiveness, which bankers and investors like. Make people aware about importance of capital/return on capital. Functions may like capital rich model(buffer stocks, excess capacity, product variety), but Finance must step in.
11. Be aware about business environment, to effectively strategize. Importance of R&D(not just Apple/Pharma company)-so CFO needs to have eye on future-innovation.
12. Making business sustainable In good environment(high demand, low cost) its easy, but under any circumstances(SCM bottlenecks, demand low, cost high, less funds, FX risks), how to make business model sustainable->effective external risk management and manage internal risks-actively participate and take ownership. Sustainable cash flow(ensuing from profitable operations) is must. Even if operations temporarily loss making, still manage cash flow by managing working capital(stretching creditors, liquidating debtors/inventory). Conversely, ensure that additional sales not from increasing debtors/inventory of company-which leads to negative FCF.
13. Has to be effective HR guy, not only within division but beyond, to inculcate that vision etc even till the shop floor also. So use experience to suggest HR practices like ESOPs/profit sharing/target linked incentives etc, for financial impact. Also, quality initiatives-ISO/process engineering. "If you don't drive the business, you will be driven out of the business"
14. While answering audience Q&A -About decision making, interesting practice in Alok that of 8 member management committe(including promoters etc), atleast 5 of 8 have to agree else proposal is withdrawn. About cost reduction, advices that sustainable suppliers also needed, so negotiate as per supplier need(immediate payment cash discount, help supplier open L/C with bank, volume discounts, reduce cost of sourcing by inventory management etc, keeping them informed proactively if payment details, e-bidding for pre qualified bidders). When asked about a difficulty faced, said that everyday is a challenge to win the battle, especially for highly geared company(!), for example he said that stock hammered down 30% in past few days and they have to face those stakeholders openly & confidently.When asked about life of CFO, joked that his wife is his second wife(job is first wife!). If his company is doing well, his family will be proud. Rajkumar Adukia said that for those mobile, the world is their playground. Family needs to be taken care but ideally tell them 'I am there for you but priorities are XXX'-he had missed moments but has no regrets as family is ok-if he's not in office he's at home-no social life partying etc.

Wellknown consultant CA RajKumar Adukia advised on how a CA can become a business leader, focusing on mindset(can-do, fire in the belly). He also said that inquiring attitude(to add value to that activity/reduce its cost) via professional skepticism, is the best learning from the CA course. CA should play role of doctor(solution giver) not of policeman! Use sound technical knowledge, ability to meet deadlines(honed under articleship training) while working under pressure, and good analytical ability to add value.  Five minimum qualities for professional as per him acronym KILL P

1. Knowledge A professional should not have any boundary for knowledge(keep learning till we retire in profession) and achievement(strive till the last breath despite limitations ). Else, even senior people(say President Finance) may not be functional leaders if they need to ask VP/Sr Mgr for each and every new thing/amendment! Have inquiring attitude of general knowledge/learning. He also advices seminars, post qualification courses etc.
2. Interact with persons smarter than oneself
3. Listening very attentively when we are in meeting/GD, and THEN give our response. He observes that even practising CAs listen to clients for 5mins, quote a fee, and then when complexity unfolded fully, they regret that should have quoted more. 
4. Learn from mistakes of others Many success stories of CEOs who are CAs vs those who have not excelled, try to compare and contrast. Books/Code of Ethics are also a good way.
5. Making presence felt by writing/speaking etc, on burning issues/analysis etc. Rajkumar Adukia himself is himself an expert on this-just see his website! Also, one needs executive presence to be able to assume leadership roles one day. Developing and learning soft skills(presentations in branches/chapters/study circles, joining Toastmasters)

How to learn 'finance', investing and trading from scratch

Thanks to my background(CA student, CS/CWA ranker) and being the lone commerce student among a bunch of engineers, I'm often asked questions by juniors and peers alike about how to understand the aforementioned subjects. While I do not claim expertise in any of them-indeed I think the day someone stops learning is when he does that-I've read/invested/traded/learnt/done a reasonable amount to identify what works for a learner-and more importantly what does NOT work. So without much ado, I present below some points for someone from a non commerce background, to approach the field of finance. As many of the points would show, I'm  a great believer in the value of self education.

1. Finance is not one huge homogenous entity: Take some time to appreciate the huge variety from asset management to corporate finance to investment banking. Whether you like finance, marketing, operations or HR, chances are that finance needs someone like you.
2. Get familiar with the jargon by reading good financial papers:-And no, I no longer consider Economic Times a good paper, due to the overdose of commercial content and tendency to confuse reporting with merely reproducing corporate press releases. While their supplements are good on Sundays/Mondays, that is the best that can be said. Instead, I would suggest sticking to Mint-that sleek orange published by Hindustan Times
3. Distinguish between learning and certifications:-Certificates are for the CV while learning is for your career. Stuff like NCFM/CFA is for the CV while mock trading/FRM is for the career, in terms of the learning value
4. The utility of NCFM:-NCFM modules are a good introduction to the financial markets, although they do depict an overly good-goody picture at times. Unless you need a certification for your work like some stock brokers/bolt operators do, the certificate itself is of doubtful utility even as a signalling mechanism
5. FLIP/other industry centered courses:-These often use multimedia, are current and practical oriented. Get feedback from other users/online forums, but these often are worth their price
6. Which qualification to pursue-CA/MBA/CFA..:-Assess yourself, match your abilities and objectives, also the time you have(can you take a full time break) and which degrees/schools help best for what. For example, FRM may be best for an aspiring risk manager, while a MBA from IIM Indore may be best for an Operations career and so on. This would need doing a lot of ground work, but no pain no pain.
7. Read Investor Letters/Transcripts/newsletters of experts:- Cisco's CEO John Chambers is renowned for his ability to 'call' the technology markets, Oaktree's Howard Mark's investor letters are the stuff of legend, and of course we have all heard of Warren Buffet's annual shareholder letters. But these are just the tip of the iceberg. In every field, be it self publishing or cooking, there are bound to be  experts who periodically share their expertise for free-even if on a time delayed basis. Use Google to find them, and then bookmark them.
8. Follow websites/blogs:-Thanks to their focus and independence, they can often give better analysis than any mainstream writer featured in the press.
9. Read financial history:-Books by Sorokin and a host of others, outline the history of crashes/booms/burst in great detail, and make the reader realize that this too will pass.
10. Don't forget finance is NOT the main driver: Even for banks/M&A advisory firms, offering finance is often just the first step/qualifier. It is technology, operations, marketing, strategy that makes the difference. Firms who have boosted their ROE with clever financial engineering(as a basic DuPont analysis would show!) have often left their shareholders holding the baby. Clever financial acumen is NOT a substitute for good business judgement. If you are a LBO fund, then maybe it is under the originate and breakup model, but not if you need to run the firm.
11. Get to know the faces/products behind the stock price; I cannot stress this enough! Many a time, a blue chip has stumbled because its leaders got arrested(Ansal/Everonn/DB Realty/LIC Housing Finance/Money Matters), management decided to spend on things like planes(Crompton Greaves) or merely because it was propped up by market manipulation(K10 stocks). And even the products/services matter. Because devoid of a clear market differentiators, that company will inevitably lose cash, and the management will have its ostrich head too deep in the sand to realize it, by which time it may be too late(like Money Matters).
12. Get a brokerage/demat account with Edelweiss:- I name Edelweiss-not because it is founded and owned by an IIM-A alumnus-but because it offers a great dashboard for seeing the fundamental parameters of a stock-and that too for free! Plus its data tools beat anything I've seen yet-and al that for free! Opening an account would get access to better functionality plus hopefully encourage them to keep those dashboards/tools free for others!
13. Identify your niche:- Some of us are great with words, others with numbers, yet others with that quick intuitive grasp of business or pattern recognition skills..the list can go on endlessly. For each of those skills, there is a great niche. For example. those good with words and a legal understanding, can pore through legal filings/notes to accounts to uncover value, as done by such sites(http://10qdetective.blogspot.com/). Those good with numbers can use DCF to good extent, those with business grasp can pick midcaps with growth potential/become VC investors, while those with pattern recognition skills can make their fortunes in technical analysis. All these are not only hobbies but great careers in themselves.
14. Do mock trading and maintain a trading diary:-In retrospect, we can rationalize to an amazing extent and even convince ourselves that we infact predicted events/did right things when we did not. Having a written record helps track those decisions, and base your faith in judgements on past empirical data. That said , past does not reflect the future as in those famous mutual fund disclaimers BUT note that even CAT/other objective exam preparation institutes suggest using past data on mocktest performance to refine test taking approach. So nothing wrong in it.

Learn investing without expensive tution fee of losses-do paper trading on mock portfolios

Many books/articles on investing all advice the reader to learn as much as he can, because he will incur the cost of learning either outside the market(books/time spent/tutition fee) or inside(losses)! But still, many of them suggest that the only way to really learn is to get your hands dirty, open a demat account, execute small trades and watch them. But, those positions are necessarily smaller than the final amount one would tend to invest. And then, if there is a better way, then why not try that?

Many websites offer the facility of mock portfolio and analysis. There is little to choose between them. But from experience, I can say that the MoneyBhai mock trading facility offered by moneycontrol is perhaps the best, because it

• replicates market conditions to the extent possible
• Gives you an initial fixed amount
• Imposes brokerage costs etc and order limits
• Infuses that competitive edge due to leader scoreboard, daily portfolio updation etc. That helps give that excitement to all concerned. 
• Has quite decent analytics, to permit dissecting that mock portfolio. 

Of course, the flip side is for those who cannot access that site during market hours(due to office proxy etc), that game is difficult. But even for the, assuming they are long term investors with infrequent orders(to be anything else is dangerous from both career and monetary angle), they can request a friend/relative to update the initial orders and then watch their strategy evolve. Now, one may question that for those buy and hold investors, an Excel spreadsheet will suffice. That is correct, but it would still not have that competitive angle.

Lest anyone mistake this post as a plug for moneybhai, let me clarify that I have no monetary or other interest in that website. The only reason for this post is that if it saves even one reader the experience of suffering harrowing losses in the virtual world, I would consider it a job well done.

The type of finance textbooks that we really need

While reading Stephen Bragg's Wiley US GAAP 2011 edition, I noticed that his book

1. presents meaningful and realistic examples guiding users in the application of GAAP to complex fact situations that must be dealt with in the real world practice of accounting
2. Explains the theory of GAAP in sufficient detail to serve as a valuable adjunct to accounting textbooks. One does not need any other 'academic' book alongside.
3. Much more than merely a reiteration of currently promulgated GAAP, it provides the user with the underlying conceptual bases for the rules, in order to facilitate the process of reasoning by analogy that is so necessary in dealing with the complicated, fast-changing world of commercial arrangements and transaction structures.  

It is the third point which is the focus of this post. While umpteen textbooks give practical examples and clarify theory, very few give that deep insight into 'why' the rules were framed. While this may not be necessary in physical sciences where laws do not change, that insight is necessary while studying man-made rules which can change with the stroke of a pen.  As the 'old school' of lawyers, accountants and other advisory professionals have discovered to their cost, there are frequent paradigm shifts. Whether it be the shift from tangible to intangible assets, and the consequential shift from book value to fair value, or the shift from court law to arbitration with the resultant choice of convenient forums/institutions, changes can happen rapidly. And one needs to be alert for that small signal indicating flux.

Finance goes through cycles, shifts and fads, which have significant resemblances. A financial history primer which covers this reasoning by analogy, is therefore worth its weight in gold.

Why I would still buy Educomp in this market

After the stock price of Everonn Systems crashed post the arrest of its MD, I thought it was time to go bottom fishing in the hitherto high valued education sector. To my surprise, while analyzing the sector, I found Educomp available at similar margins(P/E of 5, OPM of 50%+). The stock has  its negatives(underperformed the index for some time now, income tax raid) but the positives do seem to outweigh the negatives.



The positives in the stock are below. Investing now may seem like trying to catch a falling knife. But given the low P/B of 1.4(at Rs 165 book value), there is little downside risk.

• High & Stable FII + promoter holding:- For ages, the promoter has held 49%+ of the stock, with little reported insider trading. Even FIIs hold 36% of the company, which does indicate some due diligence albeit with added volatility
• Very focussed strategy:- While poring through their public filings(annual reports, concall transcripts, investor relations presentations etc) for the past 2 years, it struck me that they have segmented the market amazingly well-by age, by media(online/offline) and by need(school/vocational) etc
• Distribution strength:-As mentioned by the CEO on one of the calls, they hope to leverage their direct reach to millions of students, to induce them to subscribe to their online properties. The ethics of this apart, the approach 
• Capital allocation wisdom:- Unlike Everonn which invests its own capital in infrastructure, Educomp induced banks to fund its classroom equipment via non recourse securtiization. This allows them to invest that capital in greenfield school/college projects where they earn more.
• Advisory Council:- They have set up an advisory council comprising respected professionals to give them counsel on their business and other issues. This is a very good step. 
• Method in the madness:- I was apprehensive that they are trying too hard, and are in risk of over reachng/over extending. But given the core content and technology driven business, there are few technical issues in scalability.
  
• Online portfolio investments:- Following naukri.com's approach of investing in startups/JVs, even Educomp has done the same. While it is difficult to value its JVs with the limited public disclosure, they have millions of subscribers, and therefore would attract a good sum in this inflated domestic dotcom bubble like market. Also, they committed Rs 50 crores towards a SEBI registered Venture Capital fund, which would yield some good returns. 
• Substantial growth upside in school businesses:- As the table below shows, the bulk of their present Revenues/EBIT comes from the asset light SmartClass model, where they supply content to schools. But now, they have heavily investing in schools where the returns are just beginning to emerge. Management estimates that the grreenfield schools reach 100% capacity in 5yrs. Given that, and the famed demand supply gap for good schools(even if expensive), the growth potential is exciting.
  

  Rs in lakhs(FY11 audited)	Revenue	EBIT	CapitalEmp	EBIT%	ROCE%
  Higher Learning Solutions	6,540.08	-2,922.74	31,731.06	-45%	-9%
  School Learning Solutions	1,00,946.23	52,322.92	55,951.88	52%	94%
  K-12 Schools	13,573.21	4,765.61	1,61,285.60	35%	3%
  Online Supplemental & Global	14,030.45	-1,081.04	16,082.34	-8%	-7%

 

Retail investors face more risks than while driving cars-so make entry test mandatory?

Umpteen studies prove the same point-that investors have a very low chance of beating the market. Whether professional fund managers or amateur retail investors, they more often than not fail to beat the market. For every Warren Buffet out there, there are millions of losers(losers financially-not counting the risk lovers, education gained etc). This is more true for the derivatives market, where leverage magnifies the exposure at risk. While SEBI now insists on brokers collecting income proofs of their clients/getting clients to sign risk disclosure documents, there is nothing to ensure that investors understand the 'rules of the financial road'-risks/common mistakes/financial planning/financial literacy tenets etc, before investing. One needs a license even to drive a Rs 1 lakh nano, but not for investing lakhs in the stock market.

For financial intermediaries, NISM(and NCFM) have successfully scaled up curriculum and tests to ensure a basic level of knowledge, commensurate with the risks/products sold. But for investors who often commit a good chunk of their savings to the market, there is no such mandatory testing. One may argue that interested investors will learn from newspapers/financial press/magazines/internet etc, but they may be mislead by the wrong sources, also it may be 'too little too late'. While financial literacy is spreading via CBSE curriculum/RBI comics/investor talks/NSE tieups with colleges etc, one needs to deliver a big-bang training, to ensure that people know-and more importantly acknowledge-the various details/risks of their decision to do active investing.

Such a test could be made compulsory for those with broking accounts, private wealth management coverage etc, and then rolled out to all. Exemptions are not desirable-because often even commerce graduates may not have the right concepts. The format could be a MCQ test with caselets, in multiple languages(Hindi/English/State language), with the expense borne by the investor protection fund of the stock exchanges. It could cover the basic NCFM modules content + awareness of frauds/dangers in common investor actions like day trading, margin trading, blank POAs etc. The benefits of this are

1. Lesser chance of 'noise traders'
2. Brokers will be happy as arbitrations become easier('investors cannot claim ignorance')
3. Financial planners prospective client base will go up
4. Basic financial products(index funds, pension funds, term insurance) become more popular. 
5. General financial education level improves.

If brokers do this voluntarily(say sponsor client NCFM test), then overall benefit would happen, in my view. But that being unlikely, that regulatory prod seems necessary.

Will ISB's doing a Harvard(YLP program work)?

Harvard Business school(HBS) had launched a 2*2 program in which it admits undergraduates(obviously exceptional candidates) and admits them into its regular program after they get 2 yrs of work experience. This guaranteed admission is targeted at non business streams to attract people into management when they have other options(like pure sciences, CPA etc). Now, ISB has also launched its program titled 'Young leaders program' targeting undergraduates in their penultimate year. It will admit them and permit them to enrol after they get 18months of work experience. Now, unlike the Harvard 2+2 program, ISB's YLP program does not explicitly target unconventional backgrounds. And unlike HBS where it must filter out strong candidates from consulting, investment banking etc, ISB and other Indian Bschools largely deal with  an applicant base consisting largely of engineers with IT experience. So to bring in diversity via the 2+2 program, they would in fact need to target the other education streams like commerce and arts. But this brings in issues of comparability, fairness(aptitude) and also whether this is necessary for those who would anyway do a MBA. Anecdotal evidence suggests that the creme da lae of Indian students with research interests anyway do a M.S abroad and work there. For other streams like commerce & arts, there exist lucrative career options like CA, Actuary, IAS etc. So would this target segment bite at the ISB YLP program? Only time will tell