Photo of Harish Barai, Larsen & Toubro.

The Larsen & Toubro treasury team manages average surplus investments of $1.2 billion. The core objective of the team is to manage surplus investments until they are required for business-related activities. As Harish Barai, Deputy General Manager, Corporate Finance, states, “hence our investments are managed in order of priority; liquidity, return and limited capital risk.”

At the onset of each financial year, the team carries out a comprehensive top-down analysis investigating the broader global economy, key sectors and companies. The inputs received from this framework are the bedrock on which the investment strategy for the year is crafted. The team compiles their forecasts for key asset classes and the same are shared with the top management team. Barai emphasises that “risks to the above forecasts are also highlighted very clearly.”

In fiscal year 2013, the company earned approximately $150m on average investments of $1.3 billion translating into a pre-tax return of 10.9%. The outperformance from the more expected rate of return of 9% was on account of a strategic investment decision to increase the duration of the investments.

During the period February-March 2012, short-term rates had spiked due to tightness in liquidity conditions. This had happened on account of strong credit off-take, structural liquidity outflows, Reserve Bank of India’s anti-inflationary stance and year-end balance sheet management by Indian banks/money funds.

Barai recalls, “hence, we moved into shorter duration products like certificates of deposits (short-term bank papers), commercial paper (short-term corporate paper), to take advantage of elevated short-term rates. Subsequently in April to June 2012 short-term rates cooled off in India as it is generally a lean credit season in India and government of India also commences its expenditure programme.”

The result was that treasury was able to lock-in significant capital gains plus carry during the holding period of investments. The second major investment theme highlighted in the top-down analysis was based on the view that slowing GDP growth will lead to demand destruction and a subsequent easing in inflationary pressures.

During the period 2010-2012, prices in India had grown at a scorching pace of 9%, hitting a peak of 10.8% in 2010, supported by loose monetary and fiscal policy. In response to rising inflation, the Reserve Bank of India (RBI) then began hiking rates from March 2010 and eventually raised the benchmark rates by 425 bps to tackle this problem by cooling the economy. This along with the government policy log-jam had started to hurt growth.

As Barai states, “being in the infrastructure sector, we have a good grasp of on-the-ground activity in India. Activity had come to a standstill, the elevated period of inflation had hurt consumption and we were sure the RBI would be pressed into taking a pro-growth stance. Hence, we decided to move up the duration curve to capture the maximum benefit from a down move in rates and yields.”

Treasury was confident that this theme would play itself out but were unsure of the starting point. Taking a leap of faith call, they bought government securities and longer tenor corporate bonds, and received swaps. As the theme started to unravel as expected, ten-year Government yields came down from 8.57% in April 2012 to 8.05% in March 2013 and they were able to capture significant capital gains.

As Barai adds, “making money is all about view, timing and risk appetite. When we know that we have reasonable conviction in our view and are reasonably sure of the timing, then we are ready to go all-in to capitalise on the opportunity. Identifying turning points in the economic cycle and playing for them is where our strength lies.”

Barai attributes the team’s success to Govindan Ramaswamy’s (Vice President, Corporate Finance) ability to spot paradigm changes in financial markets and his colleague Vijay Kuppa’s hard work and exuberance.

Barai concludes, “money making is child’s play. This means that it is not as easy as a child’s play but one has to behave like a child to make money, no bias, short-term memory, no egos and a willingness to learn.”