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ICRA-Analytics FT Final

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ICRA-Analytics FT Final

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  1. 7thFinance Transformation Asia Summit & Awards Day 2 - October 22, 2020 Vendor Risk Management in the age of Finance Transformation

  2. Agenda 1 Introduction Drivers for Finance Transformation 2 Who we are 3 4 About Vendor Grading 5 Evaluating Vendors 6 The Process 7 Why Us ICRA Analytics Limited (formerly, ICRA Online Ltd.), is the amalgamated entity of ICRA Online Limited and ICRA Management Consulting Services Limited, both wholly-owned subsidiaries of ICRA Limited. 2

  3. Introduction Vikas Tarachandani Head- Financial Services (Risk Solutions & Analytics) 18+ years experience in Banking & Financial Services including Retail Banking, International Banking, Treasury, Digital Payments, Risk Management, Credit RatingModels. Worked for 9 years with State Bank of India and handled various responsibilities in Retail, SME and Corporate Banking. Was also associated with the Manipal Group for 6+ years in Corporate Strategy and as a SBU head and set up the digital payments business for the Group. Working with ICRA analytics since April 2018 and leading various initiatives and assignments in the Risk Management space. ICRA Analytics Limited (formerly, ICRA Online Ltd.), is the amalgamated entity of ICRA Online Limited and ICRA Management Consulting Services Limited, both wholly-owned subsidiaries of ICRA Limited. 3

  4. “Please post your queries in the “Ask Your Question” section”

  5. Key drivers of Finance transformation Technology Technology adoption- leading to newer, faster and sometimes cheaper ways of doing the same things Increased Connectedness Level of connectedness (both domestically and globally) at all time high levels New Ways of doing Business Businesses getting shifted to digital platforms Emergence of unique business models Regulations Increased compliance requirements New Risks- leading to newer regulations 5 5 ICRA Analytics Limited

  6. About Us

  7. Who are we A subsidiary of ICRA Ltd, a leading credit rating agency in India Moody’s Investor Service is ICRA’s largest shareholder Offers risk management solutions, market data, consulting, knowledge services and risk grading services to domestic and global clients 600+ trained professionals with ISO 9001:2015 and ISO 27001:2013 certifications Completed 10,000+ assignments over 20+ years 7 7 ICRA Analytics Limited

  8. Who are we Our offerings 1. Solutions 2. Analytics 3. Digital platforms 1. Risk management 2. Market data 3. Consulting 4. Knowledge services 5. Grading Services Delivered through 8 8 ICRA Analytics Limited

  9. Current Priorities of Finance Professionals

  10. Top priorities of finance professionals How do they achieve these (some examples) Top priorities Managing funds Maintaining adequate credit lines with banks, cash collection disbursements, engaging payables/receivables etc. Identifying managing operations, profitability revenue cash ensuring drivers, from healthy Revenue and profitability flows 01 Strategizing cost reduction Budgeting & Planning Optimising costs in purchasing, outsourcing, fund raising etc Automation 02 Identifying implementing actions, and lowering costs to boost the top and bottom lines the inefficiencies, corrective Cost optimization 03 Managing receivables and inventory levels Lean inventory Just in time approaches Day to day cash management. Optimizing collections disbursement Working capital management and Minimize Losses(Operational, Credit & Market) Grading existing and new vendors to ensure quality suppliers and smooth supply chain 04 10 10 ICRA Analytics Limited

  11. Our focus Fund Management Maintaining adequate credit lines with banks, cash collection disbursements, engaging payables/receivables etc. 01 Strategizing cost reduction 02 03 Budgeting & Planning Optimising costs in purchasing, outsourcing, fund raising etc Automation Managing receivables and inventory level Lean inventory Just in time approaches Reducing Losses Grading existing and new business partners to ensure quality suppliers and smooth supply chain 04 11 11 ICRA Analytics Limited

  12. About Vendor Grading 12

  13. Classic examples of vendor selection gone wrong Breaking News – Wrong vendor selection takes a big hit on these companies XXX Batteries Explode and Here’s Why Global Automaker Recalls 3.5 Million Vehicles Global maker, million smartphone units after reports of battery explosion. The issues apparently with batteries sourced from suppliers smartphone recalled Car recalled million pickup trucks and SUVs due to faulty brakes that resulted accidents. manufacturer nearly YYY, 3.5 2.5 in 113 were two Trouble Deepens for ZZZ as Chicken Farms come under the Scanner The poultry farms, from where the quick service restaurant chicken, had been accused of use of unapproved levels of antibiotics and hormones. Popular fast food brand, ZZZ, suffered massive drop in sales and reputational loss following supply chain issues and poultry sourcing scandal. sourced Source: Washington Post, Fortune.com, Reuters, CNBC, money.cnn; Picture source: freepik.com 13 13 ICRA Analytics Limited

  14. About vendor grading Who needs vendor grading? What is vendor grading? Entities seeking to evaluate existing vendor/dealer base or onboarding new vendors Why is it critical to grade vendors? Critical for timeliness and quality of supplies Ensure compliance requirements Partner selection 1 Deciding on exposure limits with vendors/dealers, particularly for ones rated low on scale Working capital management 2 Evaluation tool Informed decisions on credit period, order size, etc. based on quality of the vendor Decision making 3 To vendors/dealers on a defined grading scale Assessment process evaluate the quality of Preventing business and low creditworthiness exposure to partners with weak Limiting downside 4 The process aims at assessing the financial, business, management profile of the vendor Managing business relations operational and Deciding whether or not to continue business terms with existing vendor 5 14 14 ICRA Analytics Limited

  15. Evaluating Vendors 15

  16. Parameters to evaluate vendors Financial parameters a. 1. Growth in revenue and profitability 2. Debt-Equity mix 3. Working capital management and cash position 02 04 Non-financial parameters b. 1. Industry: Performing industry analysis 2. Business: Assessing competitive position, business capability, etc. 3. Management: Assessing management track record, experience, qualification, etc. 16 16 16 ICRA Analytics Limited

  17. Financial Parameters 01 02 03 04 17 17 17 ICRA Analytics Limited

  18. Financial parameters 1. Growth in revenue and profitability 2. Debt - Equity mix Revenue Steady growth in revenue is desirable Debt to equity ratio High degree of leverage is undesirable Profit Healthy operating and net profits suggests sustainable growth DSCR and interest coverage The higher the ratio, shows greater comfort in repayment of principal and interest ROCE Gives idea about the vendor’s profitability and capital efficiency Debt to net worth Compares debt level to net worth of the vendor and determines risk level Revenuevisibility Pending orders and short-term/ long-term contracts give revenue visibility Net cash accrual to debt Higher the better 18 18 ICRA Analytics Limited

  19. Financial parameters (contd.) 3. Working capital management and cash position Sanctioned limits Current ratio Operating cash flows Key metric to assess whether the core business is able to generate cash Operational cycle Assessing if limits are enough to meet operational needs. Utilization pattern is also evaluated Understanding the liquidity position of the firm to meet short term obligations Calculating operational cycle of receivables, payables and inventory is essential to understand working capital requirement 19 19 ICRA Analytics Limited

  20. Non-financial Parameters (Industry + Business + Management) 01 02 03 04 20 20 20 ICRA Analytics Limited

  21. Industry analysis Industry growth Assessing average growth rate of industry in 2-3 years Government regulations Assessing the impact of government regulations on the sector / industry Market competition Assessing number of players in the market, entry / exit barrier, control over price 01 02 04 Technology Whether modern technology is used for production efficiency and product quality Demand supply trend Understanding the demand prospects and supply side dynamics 21 21 ICRA Analytics Limited

  22. Non-financial Parameters (Industry + Business + Management) 01 02 03 04 22 22 22 ICRA Analytics Limited

  23. Business model competitiveness Order book position To assess the current and expected sales volume/revenue Customer concentration Whether there is any dependency on large clients / industry groups, etc. Supplier concentration Whether there is any dependency on any large suppliers 04 Infrastructure and technology Assessing if business is technologically equipped and has required infrastructure to manage work efficiently Employee relations Having healthy relation with employees and trade unions is necessary for ongoing business 23 23 ICRA Analytics Limited

  24. Non-financial Parameters (Industry + Business + Management) 01 02 03 04 24 24 24 ICRA Analytics Limited

  25. Management experience, track record and more Organization structure Authority levels, flow of instruction and succession planning are assessed Experience and Qualification Promoter experience, track record and qualification help understand their competency Internal Controls Provide comfort in terms of good governance and overview from Board / Top Management 02 01 02 Support from parent company Support from group or parent company is considered a positive General & Market reputation Repayment history; relations with suppliers / customers Net worth Promoters’ net worth to evaluate an entity’s resilience to financial stress 25 25 ICRA Analytics Limited

  26. The Process 26

  27. The grading process Site visit Basic vendor information Client provides vendor names along with basic details Grading output The grading report details the various parameters and results of the process. Team may visit vendor’s site per client need Report preparation Analysts prepare a report based on the data collected and the site visit Data gathering Team gathers information through alternate data and documents from client A periodic review or an early warning alert, based on requirement 27 27 ICRA Analytics Limited

  28. Alternate data: A key differentiator Compliance determines the character of a business, its policies, legal obligations, statutory requirements , etc. Return filing as per statute GST PF and TDS deposit payment and filing Major differentiator while assessing a company from its peers 01 Even with limited financial history, statutory compliance is must Advance income tax payment Auditing and other compliances Filing of financial statement Highlights the internal control process readiness and efficiency Ensures risks due to non-compliance do not get transferred to other stakeholders 28 28 28 ICRA Analytics Limited

  29. Why Us 29

  30. What partnering with us means for you Vendor selection is a critical decision. Our vendor grading service can help you with: Experienced team Strong in-house experience with demonstrated track record in building grading and rating models Rich parentage Evaluating and assessing company performance part of company and group DNA Technology Enablement Evaluation process and models are complimented by alternative data points to make it comprehensive Transparent & Interactive process Our grading is a well documented and interactive process well accepted by leading organizations 30 30 ICRA Analytics Limited Picture source: freepik.com

  31. 31 Leveraging Knowledge, Experience and Technology to yield Augmented Results THANK YOU! Contact: Vikas Tarachandani Head – Financial Services Ph: +91 91527 32791 Email: vikas.tarachandani@icraanalytics.com Dr. Rajesh Khanna Head – Grading Services Ph: +91 98107 20501 Email: rajesh.khanna@icraanalytics.com 31

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