In the year 2018 we saw businesses come back on a steady keel after the volatility of GST implementation and the aftermath of demonetisation of the earlier year. There were a few positives such as the robust core sector growth and the improvement in business profitability.
The period also witnessed businesses getting increasingly open to explore digitisation. And then there were pains too, thanks to the liquidity issues especially for long term funding of projects surfacing late in the year.
Here is my take on the trends that the finance community can expect in 2019 and the key areas they must keep in mind going next year.
What CFOs Can Take Forward From 2018
- CORE SECTOR GROWTH TO SUSTAIN
There was investment in upgradation and new facilities in commercial and industrial buildings construction. These activities reflected the growth in several sectors. As the earlier year 2018 was volatile, quarterly growth percentages would not always give the correct picture, but adjusting for aberrations, growth in manufacturing, utilities and services was significant.
Adjusting for the variances in the oil sector and in the financial sector (for different reasons), core sector growth remained strong. The traction in these sectors gives us optimism for 2019; I expect that the pace of growth will sustain.
However, CFOs while they commit investments for growth this year, will have to think about mitigating the risk of volatility as it is the election year.
CFOs, while they commit investments for growth this year, will have to think about mitigating the risk of volatility as it is the election year.
The other positive factor in 2018 is the improvement in profitability in businesses across the board. Corporate results show that, adjusting for sectors like oil and finance, operating profitability improved by at least 2 percentage points across sectors.
This came from efficiencies and was achieved despite increase in the cost of commodities, salary and wage inflation and an unfavourable exchange rate movement. This shows the focus that businesses have on improving productivity and utilising processes and technology for the same.
- INVESTMENTS IN DIGITAL TECHNOLOGY TO CONTINUE
Businesses are increasingly open to explore digitisation in processes in manufacturing units, in buildings, in the supply chain, power generation and resource management.
The advent of digital in the individual lives of people is opening them up to explore digital in their work areas. This is a trend which will grow exponentially. It will bring a shift in the way in which assets and resources are managed and can lead to a different level of efficiency and productivity in business. CFOs will have to deal with assessing these opportunities and building business cases for them. Being non-linear, these opportunities may not always be fully measurable.
Finance executives must equip themselves to understand the possible implications of such investments and create the structure for monitoring the outcome, laying down stage gates for decisions, etc.
- LIQUIDITY MUST BE RESTORED
One of the pains we had in 2018 was the issues around the tight liquidity in the system, especially for long term funding of projects. The financial sector was troubled by banks with high non- performing assets, a large financial institution coming under stress and general nervousness in the financial sector.
Banks and financial institutions have the inherent need to lend. Business has the need for funds. CFOs shall trust the central bank to regulate in a way in 2019 to balance credit risk and credit growth.
The dynamic of smooth lending and borrowing must be restored if businesses have to grow. I would like to see long term interest rates moderating in 2019. Finance leaders will have to keep a hawk eye on credit risk. Flexibility and prompt action will remain important.
- IBC TO CONTINUE EVOLVING
The application of the Insolvency and Bankruptcy Code (IBC) evolved in 2018. While many businesses came under its application, certain issues jammed the progress of some of these cases.
Eligibility of bidders and higher bids being made after the bidding process had been completed were some of the issues which went into litigation. While these need resolution, I believe that IBC is putting in place the right mechanism for addressing borrowers in default. It is creating a market for stressed assets. Moreover, it is creating among potential borrowers the knowledge of consequences if creditors are not paid.
What CFOs need to focus in 2019
Below are a few things which I think that the CFOs need to keep in mind going next year.
- GST: GETTING THE RECONCILIATION EXERCISE RIGHT
While GST stabilised, the process for clearing off unmatched credits remained a challenge especially for businesses with multiple inputs and common vendors across entities. The annual return process has also had its issues. The administration has been open to feedback by and large and has been responsive.
I expect that the process for matching of credits and the return requirements will improve with some measures taken by the GST Council. However, this is an area to keep a close watch on as unmatched credits signify P&L risk beyond a point.
The new accounting standard Ind AS 116, likely to be applicable from April 2019, is a significant change. Reflecting AS 16, this standard changes the way leases shall be accounted, especially by lessees. The change in accounting is to reflect the real cost of leases, distinguishing between the cost of financing and the amortization cost of the asset enjoyed.
This will impact reported operating margins, financing cost, assets and liabilities balances, cash flow statements, debt to equity ratio and return on capital employed. It involves analysis of lease contracts and computation for correct accounting. The impact will have to be explained clearly to the board and to investors.
- US-CHINA TRADE WARS: MANAGING GLOBAL VOLATILITY
On global issues, I would like to leave behind the uncertainty brought about by the tariff war rhetoric between the US and China. While the intensity of threats rises and falls between the countries, businesses are already re-setting their strategies to mitigate the risk of a trade war like situation.
While there may be some opportunities for India in the bargain as some production or export points may shift from China to India, the volatility caused by a trade rift between two giants cannot be good for business growth. If however the tension continues, CFOs must look for opportunities in the domestic market and mitigate volatility risks in foreign markets.
India remains a growth economy. CFOs must plan to invest in technology and processes which create capacity, improve productivity and improve customer access. The environment may remain volatile in 2019, being the election year. Challenges with funding, credit risk and exchange rate risk have to be dealt with. Change in standards like Ind AS 116 will need attention.
Overall, CFOs must continuously learn and equip themselves to make the most of these opportunities for responsible business growth.