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The reward in risk

Anand Adhikari     April 14, 2010

February, 2009: Prices of copper, a commodity that engineering and construction giant Larsen and Toubro (L&T) uses in abundance across a range of projects, are at a year's low of $3,400 per tonne. Y.M. Deosthalee, Whole Time Director and CFO, L&T, decides it's time to lock into long-term contracts at this price in large quantities totalling 6,000 tonnes. The total value of these contracts runs into a few billion dollars. "That move helped us make some big costsavings," grins the 63-year-old CFO.

Reason: Prices of copper today have shot up to $8,000 per tonne. That's just one of the countless shrewd decisions made by Deosthalee over the years. And it fits well with his credo that treasury management isn't just about "churning out profits," but it's also about "managing risk effectively and protecting business margins."

A.M. Naik, Chairman and Managing Director of L&T, says,"Risk management is all about striking an optimal balance between competitiveness and profitability." Few corporate treasuries can hold a candle to that of L&T in terms of sophistication and complexity-the treasury of Mukesh Ambani's Reliance Industries would be one notable exception- as it goes about managing risk across currencies and commodities.

For the man who joined L&T some three-and-a-half decades back, the one constant has been the new challenges. When executing billion-dollar projects in sectors that range from power to hydrocarbons, the company has to deal in at least a dozen commodities (which serve as inputs) and a web of currencies (in which it borrows or is paid in for turnkey projects).

"The biggest challenge is to budget for a project in terms of costs and expected revenues 3-5 years after the bidding is done," says Deosthalee. Any one decision gone awry has the potential to shrink margins and pile up mark-to-market losses.

Deosthalee and his team have got it right most of the time. Like when L&T shifted from an open position in a yen-denominated borrowing to completely hedging it. It was in July 2007 that the treasury guys spotted a very erratic pattern of the yen appreciating against the US dollar-in sharp conrast to the trend that prevailed for years of a depreciating yen. Larsen and Toubro, like many domestic and global companies, had a bulk of its borrowing in yen-equivalent to $1 billion-because of the rockbottom interest rates in the Japanese economy.

"There was no point in remaining open (once the yen started appreciating)," recalls Deosthalee. So a decision was taken to hedge the exposure fully by August 2007 between 117 and 122 yen per dollar compared to 94 yen today. Similarly, forex loans of $1 billion were hedged during March and April 2008 between $40 and 40.50. If L&T had not hedged the yen exposure, the mark-to-market losses could have run into thousands of crores.

Another example of timely risk management: Today, the entire liabilities of L&T are on a fixed interest basis with interest cost in the range of 4-5 per cent. This was locked much in advance when the company saw oil and commodity prices beginning to rise.

Back in 2007, much before the onset of the global crisis, the engineering giant was busy building up the liquidity. It even made a Global Depositary Reciept issue in 2007. So when the recession hit, L&T was flush with liquidity, and actually in a position to hunt for acquisitions (it went after Satyam but that it didn't bag it is another matter).

"We were able to look at things much more optimistically in an environment in which many others were struggling to stay afloat," says Deosthalee. In fact, L&T was able to invest its surplus funds in good quality paper as the yield went up to 11.5-12 per cent for 10-year paper.

Deosthalee says: "In 2008-09, we generated an average return of almost 14.5 per cent." Its investment portfolio in government securities, corporate bonds, mutual funds and equity today stands at Rs 8,000-10,000 crore. Deosthalee has also gone about building a solid team in his 45-member treasury.

He's assisted by 46-year-old Govindan Ramaswamy, General Manager (Corporate Finance) at L&T who, come May, will head to General Electric's headquarters in New York's Fairfield. "The idea is to understand how they manage growth at the peak and when in a trough," says a beaming Govindan, who is hoping to get lucky and meet GE CFO Keith Sherin.

Govindan's first-of-its-kind expedition is part of a larger treasury programme in which L&T plans to engage itself with high-quality global institutions that have survived for over 100 years. That's one way to become a high-quality global institution with topnotch risk management systems.

Best in Treasury Management
Y.M. Deosthalee, CFO/ L&T

  • Background: LLB & Chartered Accountant; Rose from GM (Finance) in 1990 to Sr. VP five years later with a board position. Has been CFO since November 2001.
  • Winning move in 2008-09: Hedged foreign currency loans well in time, which would otherwise have meant provisioning Rs 1,500 crore at the peak of crisis.
  • Challenge Ahead: To prepare for and manage peaks and troughs in an economy over the lifecycle of a company.
  • Most likely to be heard saying: "The basic purpose of a treasury is to not just churn out profits but also manage risk effectively and protect margins."


  • Build up liquidity in the good times.
  • Budget costs and revenues for projects with a gestation period, right from bidding to execution.
  • Learn lessons from topnotch global institutions on how to manage growth (in boom times and during downturns).

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