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Driving success through credit expansion efficient capital allocation and cash turnaround - EY - India

Driving success through credit expansion, efficient capital allocation and cash turnaround

Industry segment: automobile manufacturing: Series — 3

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This report focuses on helping automobile manufacturers reassess the role of their treasury function.

As the automobile industry in India matures and competition increases across segments, margin pressure is likely to increase. The key to sustainability lies in investing in new platforms and technology that improve customer experience and reduce the total cost of ownership for the customer.

While automotive sector treasuries have improved their liquidity management practices and focused on cash turnaround, managing working capital financing and credit expansion across the value chain is yet to be mastered.

Credit expansion is also fraught with default risks. De-risking the value chain along with expanding credit is a key challenge for treasuries to address. The role of treasuries in capital management has been limited to raising long-term financing.

In the current scenario, treasury function in the automotive sector is required to manage capital allocation and financial supply chain across the core business, suppliers and dealership networks.

The business value chain and enhanced role of the treasury function is depicted below:

In the automotive sector, treasury management is required to become a strategic function focused on managing cash flows across the product life cycle with a clear focus on return on equity from each project.

Therefore, treasury management should focus on the following key areas:

  • Determination of the optimal capital structure and potential leverage for each project to enable performance management at a project level
  • Reduction in cost of capital through long-term fund raising activities with a view to support the entire product life cycle including design and development
  • Arrangement for financing the supply chain, dealer and service network through innovative instruments designed to monetize inventory and receivables
  • Expansion of credit to the end-user while continuously de-risking the core balance sheet from potential defaults
  • Cross-border liquidity management to enable quick transition to lower-cost production bases without creating cash traps across the organization
  • Structured hedging program integrating currency and commodity price risk management focused on overall margin management and reducing cash flow at risk
  • Integrating management of dollarization impact with the overall currency risk management strategy
  • Ongoing project performance assessment with a view to optimize the capital structure and allocation and enhancement of return on equity

This report also explores the manner in which treasury management can be made more relevant to protecting core business cash flows and supporting a product through its life cycle. Download our report for more.

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