Building a smart and simple treasury

The challenge

Maruti Suzuki India Limited has exposure to foreign exchange, commodity price and interest rate risk. It is imperative that treasury manages these risks to ensure the sustainability and continued profitability of the company.

With a lean treasury team, the objective was to improve the current treasury framework, process, systems and strategy to harness the potential of every team member.

A decision was made to improve the treasury function through the implementation of best practices across FX risk management, investments management and cash flow management, the objective being to create a simple, sustainable, quick, efficient and innovative treasury function that could support Maruti Suzuki as it continued to grow.

The solution

Maruti Suzuki revamped its foreign currency risk management process through several changes including the implementation of a natural hedge philosophy. This two-step process first saw the treasury create an internal natural hedge through matching currency receipt and payment on the same dates and undertaking simultaneous buy-sell of such exposures on transaction day. It then removed the timing differences between the payments and receipts through the usage of a ‘buy sell’ hedge strategy.

The treasury also implemented disciplinary hedging with lead and lags. Currency Options were also added to the list of risk management tools that the treasury could use which provided downside protection while enabling full upside participation in an volatile environment where currencies move 10-15% in a year. For real time monitoring of global markets it uses Thomson Reuters Eikon – version 4.

On the investment management side, a new strategy was put in place to take advantage of the falling interest rates and reduce tax liability by investing in growth schemes of debt mutual funds for a period of more than three years. Investments were made in an appropriate mix of duration, short-term and fixed maturity plans of debt mutual funds, keeping safety and quality of mutual fund portfolio in mind. This strategy resulted in MSIL earning better returns then the prevailing market yields by a couple of percentage points.

To better manage these investments, Maruti Suzuki moved away from spreadsheets and implemented a TMS provided by IBSFintech. This resulted in N2N automation ranging from transaction processing, accounting and reporting.

Finally, in the cash flow space, Maruti Suzuki has to deal with a large number of bank accounts and multiple inflow and outflows. To streamline how it manages its cash the treasury actively manages its cash balances by projecting the inflows likely to be received during the day and comparing this with the payments it has to make. This helps treasury to plan the cash management on day zero itself. The net surplus amount is then invested on the same day whilst any deficit is met through short-term borrowings. Cash pooling is also used to create even greater efficiency.

Best practice and innovation

Throughout the project, the Maruti Suzuki treasury wanted to keep the solutions simple yet sustainable, quick yet efficient and innovative yet easy to implement. The result has been a project that has fundamentally reshaped the treasury through the use of best practices.

Over the past two years, the treasury has evolved and is now managed in a way that harnesses the potential of each member of the treasury team through bringing system efficiencies, cost savings and improvised risk management.

By moving from spreadsheet models to a TMS, using innovative methodology for foreign currency risk management, sound investments strategy and creating an efficient way to manage cash flow operations the treasury has been able to contribute to the bottom line of the company.