MONEY TALKS – MAKE THE BEST OF THIS JOURNEY

Most of us take/ have taken medical insurance for our parents as a part of group policy from employer. Ideal scenario is having separate policy or family floater policy other than group policy taken. But then what if not done especially when the age to be covered is beyond 60?

That was a key concern for me when I decided to take a long-term break from corporate employment. Just in time came the most crucial information from Mr Amit Kallianpur on porting group policy to individual/floater plan. He highlighted this option which enabled me to continue the group medical insurance which had 10 years continuity.

Interestingly very, few even in the industry know this information.

Image by Tumisu,from Pixabay

The regulatory norms for last couple of years have included the option of converting the group policy to individual policy. And it helps-

Continuity benefit/ Waiting period/ Pre-existing conditions covered under existing group insurance policy.
Limited options on Getting insurance coverage for elderly especially on entry age etc .
When deciding on starting your own venture or freelancing where the fear of losing out these intangible benefits on health cover from company affects your decision.

So you can continue the policy with same insurance company with continuity benefits of earlier years post leaving the employer from where this policy was taken.

You need to initiate this conversion at least 45 days prior to your last working day. You can write directly to the group insurer who can guide the employers on the process if not known to them.

It’s noteworthy to highlight on the quick response I received from the New India Assurance co – from the chat bot( this one is quite intelligent unlike other experiences where you have to wait for the bot to understand a simple request ) to the person in charge who handled it subsequently.

So, make use of this option of portability of Group insurance to individual when making a switch/change from employment.

#Groupinsurance #medicalinsurance #porting #Healthinsurance #Migration

Credit Series- 9/ Related party Value chain

August 6, 2020August 6, 2020 preetymundhra

It’s interesting to see how businesses have evolved over the period and share some common trends. Today while evaluating majority of borrowers including an SME; you will see that promoter will have at least two business entities doing similar or different activities .

Single product, single entity and single promoter is rare to see now .

So why do the businesses form different entities:

To diversify if getting into new business line via a new entity . ( Thin line between diversify and divert, so understand the reasoning).
To take benefit of incentives or arbitrage which may be available on certain constitutions and locations.
To prepare for succession planning.

Having multiple entities in itself not a sign of anything. Understanding the value chain between those – in terms of dependence on sales and purchases and true nature of transactions is what is critical; along with obviously how important is the business you are proposing to lend to is in the overall structure.

rope-1314964_1920

Image by Jerzy Górecki from Pixabay

Some core steps which helps understand it better :

Evaluate the notes to accounts/ other disclosures on related party transactions as a starting point and the overall quantum & trend therein in terms of size of company.
One limitation in above is how the related party is being treated and which ones are being treated. So for that understand the different businesses run by the same promoter group. You can look for common directorships or you can look at sources of income in case not a limited company.
Understand dynamics behind group company sales and purchases in case they are significant.
Understand who are the major customers and suppliers and relate that to the banking transactions.
Always take help of google on customers/ suppliers with whom major business is being done if other than known entity.

If you find a missing link in any of the above with what you understand about your borrower; then that’s the area you need to decide whether in the overall pros and cons of the credit proposal you can accept that.

So how do you evaluate the related businesses ?

Link to Credit Series : https://preetymundhra.com/2019/02/21/credit-series-introduction/

MONEY TALKS

Credit Series- Myth on EBIDTA

March 11, 2020 preetymundhra

“The company is able to pass on the increase in prices with a monthly/quarterly lag. They have been able to maintain EBIDTA margins YOY inspite of fluctuations in crude”.

“This company has been able to consistently deliver EBIDTA margins of 10% in last 3 years”.

I had come across these statements multiple times. Considering how each business is dependent on a core raw material where ultimate price- cost as well as sales- is dependent on a variable or benchmark, we all come across businesses similar to these.

Sensitivity is generally run on the EBIDTA % and conclusion mostly is that increase or decrease in raw material price can be passed on to customers.

But how many times do we consider the situation when even if EBIDTA margin is constant, due to the reduction in benchmark price absolute EBIDTA would be significantly lower.

Take the below example of a large corporate with raw material and finished product dependent on crude.

CRUDE

It was able to maintain constant EBIDTA margin % in first two and last two years. However absolute amount points to the wide fluctuation in cash generated which would impact the surplus available for repayments.

Start looking at the price trends in clearly identifiable variables and understand that how the gap due to downward movement would be filled in even if margins in % terms would be maintained.

It’s the absolute EBIDTA and not the margins which will impact the loan repayments.

Closer tracking of these movements will help understand and mitigate the risks in better way rather than only evaluating the financial covenants on DSRA or Debt to cash accruals which would be past historic data and would come after a time lag which may be too late at times.

MONEY TALKS

CREDIT SERIES-7- Look beyond the good numbers

March 6, 2020March 6, 2020 preetymundhra

This company has been consistently delivering excellent performance for the last 5 years inspite of challenging business environment with multiple business events including the crude movement on which its prices are dependent. Increasing sales YOY, margins remaining stable and leverage ratios well within the acceptable levels.

Further on one side rating has been upgraded but at same time promoters pledge was increasing.

Closer look revealed that although borrowing is increasing with sales growth but some lenders moved out YOY. On discussion with those lenders it came up that business numbers and actual numbers don’t really match and not sustainable long term.

MONEY TALKS

CREDIT SERIES-6- MIS-match in numbers

May 27, 2019May 31, 2019 preetymundhra

Numbers if don’t match there is a story to be uncovered.

Other key number to look at other than financials is the regular MIS in form of stock, book debt statement and creditors statement.

Listing some common practises which helped understand the business better and identify signs which helped decision-

Compare the difference between the year-end inventory levels as per stock statement and balance sheet & understand the reason for major variance therein. Normally for the year end month ie March the statement submitted is not of Mar31 but Mar 28 or 30.
Ageing of the components (stock, debtors, creditors) is not seen in majority of statements but if there is a spike or levels which as per industry/ business type appears higher understand why ?
There was an instance when on comparison of receivables over 6 month period revealed that similar amount was appearing over the period and bucketing was shifting back and forth. On further discussion it was found that there were serious receivable issues being faced by the company.
Look for related party names in receivables & creditors list. Creditors list is not regularly shared but if levels are sizeable insist and see how it is spread out.
Businesses where inventory is the key component look at the quantitative numbers, ageing and composition.
- Quantitative nos will help you arrive at the average cost per unit which for a commonly available item can be compared with market price. A customer was showing his closing at quite a higher amount as compared to avg price. On further enquiry it was found that the customer was also making two different stock statements- one for bank and other which was actual.
- Ageing of inventory is normally not given but esp for businesses risking old inventory like automobiles check the ageing from invoice. There was once can interesting instance of same invoice number appearing for two different dates. See the quantum of such instances and understand the reason for same. Subsequently it was found that the client was facing serious challenges on old inventory and was trying to sell his dealership and assets to tide the situation.
- Look at what exactly are they carrying in inventory. There was this other instance that the entity was showing jewellery and land bank in inventory while the core business inventory was not substantial. So overall inventory number was looking fine but the composition of it was not what the business was into. Later the business was found to have diverted funds and filed for debt restructuring.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.

MONEY TALKS

Credit Series-5- Everything looking bad is not always bad.

April 23, 2019May 31, 2019 preetymundhra

Take a look at the below numbers. Good, Bad or ugly seeing years 1-3 ? On face of it, will fall in last two categories on first glance.

preetyweb

There were lot of factors playing at same time in it-

Extraordinary income and expenses.
Fluctuating sales.
High borrowing vs sales.

But also what this company continued doing was investing in

Fixed Assets
People ( Look at employee cost even though sales had fallen).

Here it was important to understand the non-financial metrices which were in favour of company-

World class manufacturing facility.
Product required multiple approvals from regulatory bodies as well as business associates.
Business associates (customers) were leading industry players and had offtake contracts and long term past association.
Problems which led to the bleeding in P & L were clearly identifiable and corrective processes were in place.
Ability of the promoters to pump in money if required although was yet to be demonstrated.
Happy, dedicated and long vintage employees.

Below is what happened YOY subsequently in short –

	Year 10	Year 9	Year 8	Year 7	Year 6	Year 5
Short Term	A1	A2+	A2	A2	A3	A3
Long Term	A	A-	BBB+	BBB	BBB-	BBB-

So even though the operating numbers didn’t look good, it was a good credit if you give benefit of above factors the foundation was strong to come out of challenge which it was facing.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.

MONEY TALKS

CREDIT SERIES-4- MARKET INTELLIGENCE

March 26, 2019May 31, 2019 preetymundhra

Case –II – Stock Market Data

Market movement of share prices and market cap is one of the most intelligent indexes especially if it’s a homogenous business and there is adequate free float.

So there was this company which was into lending for a certain asset class. Key performance indicators of the lending business – NPA levels, capital adequacy ratio, liquidity coverage ratio and provision coverage; all were good.

But somehow the market didn’t seem to appreciate that fact. It was evident from just broad indicative numbers as below without going into any fundamental or technical analysis.

Entity	Total Assets	Market cap/ Total Assets	Market Cap/Sales	Market cap/Net profit
A	1,00,000	0.30	2.5	9
B	1,30,000	0.21	1.8	13
D	88,000	0.05	0.4	4

We can see a clear outlier there in these numbers. These numbers looked like something below 3 years back-

NAME	Market cap/ Total Assets	Market Cap/Sales
A	0.45	4.0
B	0.27	2.2
D	0.10	0.9

The investor community sensed that there was more to these numbers. And then if you look at the below lagged indicator, events started happening and reflecting the true position-

NAME	YEAR 1	YEAR 2	YEAR 3	Outlook
A	AAA	AAA	AAA	Stable
B	AAA	AAA	AAA	Stable
C	AAA	AAA	AAA	Stable
D	AAA	AA+	AA-	Negative

So especially in businesses which share common characteristics, try understand if any areas beyond the numbers only needs to be looked into.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.

MONEY TALKS

CREDIT SERIES-3- MARKET INTELLIGENCE

March 12, 2019May 31, 2019 preetymundhra

If market intelligence points to something, explore that further

We have all been caught with surprise on a number of occasions when an account always repaying on time suddenly starts delaying.
So my experience is that it is something which starts showing signs in other areas as well before it starts in the delay mode.

Case-I – Auto dealer with reducing sales volume and increasing inventory

There was this car dealer which was one of the prominent dealers in a certain geography. The repayments were all on time. But below was noted when it came for review-

Change in lenders and reduction in exposure by other lenders. It was cited that those lending institutions have reduced their exposure as industry stance.
Sales had substantially come down but inventory figures reported didn’t match with sales level.
Inventory amount reported and inventory ageing were not in sync.
All key outlets were rented.

On market check it came out that it is looking for selling its dealership.

On checking the inventory position of two periods it came out that two different invoice dates for same vehicle was given, leading to wrong ageing of inventory and that inventory as old as two years was being carried.

Now that dealer is looking at monetizing its other assets and reducing the debt. The dealership business may or may not continue in future.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.

MONEY TALKS

CREDIT SERIES-1- Numbers are numbers

February 28, 2019May 31, 2019 preetymundhra

Case I- Compare peer profitability and understand leverage

This was one of the key auto ancillary player. Fantastic profitability and excellent rating. I was doing a research on the margins across the value chain in this industry few years back. Even the most niche and sophisticated product in auto ancillary chain was not making the kind of EBIDTA margins which this company was making.
There were other customers also doing similar business but the margins declared by them was less than one-third of what it was showing consistently.
And the international operations and acquisitions of businesses in domestic and overseas locations was quite a frequent phenomenon.
The catch was the rising pile of debt and the ever continuing double digit margins in a low value add business.
Numbers looked something like this-

table

Finally the story had to end. Margins, sales started crumbling on one side and repayment obligations & debt piling on other side. Refinancing and new borrowings stopped.
What’s important to appreciate is that debt has to be looked not just as a debt/equity ratio, but as sales to debt as well.
The business is today looking for buyers which can make use of some of the good factories it had created. If it was not for these facilities and the employment opportunity, it would have been cast in history by now.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.