Mission GST: No Shortage For Patients, No Losses For Partners
The countdown has begun for the roll out of the Goods and Services Tax (GST) from July 1. It’s a landmark tax reform that will transform the way India transacts. GST will ensure a much-needed clean-up of the Indian tax system, and pave the way for a level playing field across the country. For consumers, it’s aggregate impact on the household budget is expected to be neutral. As with any new measure, an initiative on such a huge scale will face some initial hiccups. Internationally, GST has often led to short-term inflation. However, a clear message is being given to industry to pass on the benefit of GST to consumers.
Drawing from a personal context, the pharmaceutical sector is not adequately prepared for the upcoming GST regime. For instance, in the due course of my daily interactions with our distributors and stockists, a sense of uncertainty prevails. The biggest fear of the distributors is that they would be burdened with old stocks (of higher taxes) and consequentially suffer losses once GST kicks in. The result? Many patients would be deprived of timely and critical medication. As an industry built on the foundation of #CaringForLife, it was important to quell this chaos surrounding destocking and restore their confidence, so that patient supplies would not be affected in the days and months ahead.
For instance, at Cipla, teams across functions – finance, taxation and IT – have been working round-the-clock for the past six months, to ensure our entire ecosystem is GST compliant from July 1.
From direct interactions with large stockists and hospital chains in the metros, to personal meetings with traders in Tier-II & III cities, our approach was collaborative from the start. We urged our partners (distributors/stockists) to maintain regular stocks and in the event of any losses due to GST implementation, offered the requisite compensation. Moreover, should they face liquidity issues with their working capital, necessary support was assured. The ultimate purpose – safeguard interests of patients and our partners, during this transitory phase.
Drawing a parallel from a sweeping reform such as demonetisation, transition to GST will take time to reach the lowest denominator. As a counter measure, the Finance Minister has made a 45-days provision for this initiative to become integrated with the system.
As the nation gears to make this progressive leap, it should be the next logical step for industry leaders to support the adoption of such initiatives that will aid in integrating their value chains – keeping the people’s interest at the core. The rest is just another day at work.
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Books – A Cerebral Affair
“A Reader lives a thousand lives before dying. Those who never read live only once!”
We enter the corporate world with the confidence that we can change the world. But this lasts only “until the coarse necessities of physical existence drag us from the height of thought into the mart of economic strife and gain”. Our everyday challenges – finding and then doing well in a good job, keeping up with an often fragile relationship, the heavy load of expectations from our parents and ourselves, lack of clarity on what we really want to do in life, the rat race and constant comparison with our peers –pull us down into mediocrity. And the grand idea of being the very best we can be gets quietly put aside.
So Why Books?
If we agree that good counsel can help improve life, what better guide than books? Mentors and teachers can come and go, and may turn out to be false Gods. Why not drink from the ageless wisdom of good books, learning from the myriad experiences of some of the best of our species?
As Durant said, “When life is bitter, or friendship slips away, or perhaps our children leave us for their own haunts and home, let us come and sit at the table with Shakespeare and Goethe…”
What To Read?
There is a book for every mood and occasion. I can start with a few from my side (click the link for more recommendations and a short summary)…
Are you feeling dejected and lost? Read Philosophy and delve on the deeper meaning of life. Start your journey of self-discovery through Siddhartha or the big question on God through The Case For God.
Are you feeling low after your annual review? Lookup something in the Self-Help genre to improve yourself. Perhaps read The Seven Habits of Highly Effective People to understand what makes people successful or read The Happiness Project to understand what gives us happiness. Or even Tuesdays With Morrie to learn life’s greatest lessons from a dying man.
Are you plain bored? Read good Literature, the narrative of our lives, and get entertained and glued. The Kite Runner will make you cry and cringe, and The Animal Farm will bring alive how power corrupts.
Do you need more tips in managing people and work? Tons of Management books to choose from. The One Minute Manager to manage people and work better or Don’t Sweat The Small Stuff to get a new perspective on all the daily stress in our lives.
The list wouldn’t stop.
(If you want more, see my blog on 100 Books To Make Us Wise).
Part of what makes a book memorable is our own life experiences that can relate to it. So look out for what appeals to you. Obviously, choose the books very carefully. Good books can be an everlasting love affair, just as bad books can be more enervating than a date gone horribly wrong.
Union Budget 2018 – A Budget That Improves The ‘Health of the Nation’
Union Budget 2018 did a commendable job in addressing critical social sector priorities such as healthcare, education and agriculture – a progressive move that will help improve rural economy, encourage entrepreneurship and trigger future growth.
We welcome the world’s largest government-sponsored healthcare scheme – Ayushman Bharat Programme which will extend the benefits of health insurance to 100 million families, ensuring access & affordability of healthcare products and services to a larger section of the society. While there is no immediate impact on the industry, the move could trigger a rise in demand for medicines.
The investment in Government health and education programs is indeed, an extremely progressive step that will usher in healthcare reforms in the country. The industry continues to remain hopeful of the Government to take steps to promote pharma R&D in the country through the rollback of phasing out of weighted deduction on R&D.
The extension of the lower corporate tax rate to MSMEs will support expansion and growth. It could have been extended to larger corporations as India’s corporate tax rate is towards a higher range when compared globally.
On the larger macro-economy, the focus on financial prudence and keeping the fiscal deficit under check is appreciated. The reintroduction of LTCG tax might be perceived as detrimental by market participants. The recommendations and policy changes in the budget have the promise to take India forward on a trajectory of economic growth. However, the implementation of the same on the ground level will prove to be the litmus test for the government.
People And Process: The Backbone Of Quality
Quality and consistency are important to every industry, more so the pharma sector. Every industrial sector has its own rules and regulations that govern it, and the pharma industry is no different. It is important to follow certain processes to ensure quality of the end product. We all know and realise the importance of these processes, but as an industry, we still face several problems of quality.
The four Ps
In my opinion, there are several factors that contribute to the success of an organisation, the most important, in our context, being the 4Ps: Patient, Physician, People and Process. The initial two – Patient and Physician – are vital to us. Though they are the reason for our existence; they are external factors. The last two – People and Process – are internal factors that contribute to quality, and eventually to our success. These two factors are central in the larger scheme of things.
The right processes
Quality is the by-product of excellence and consistency. It’s not just enough to achieve high standards of quality; an organisation must be able to replicate it consistently to achieve success. When we create a process that is simple and fail-proof, it is that much easier for employees to follow it without making errors. It is important for an organisation to continuously work towards simplifying the process, so people can carry it out consistently, day on and day out.
Sometimes, we have procedure documents that run on for more than 100 pages; it is not easy to follow such processes every single day flawlessly. People are prone to error; sometimes employees are not in the best of health, or they might be distracted by other things. Everybody has good days and bad days; people are not robots, they have emotions. What they do at work has a great impact on the organisation’s success. We need to create procedures that are fail-proof, and simplify the lives of the people who work on the product, thus ensuring that the end product is always safe and effective.
People drive the organisation and it is important for every company to invest in the right people. Twenty years ago, I thought that it was the process, the SOPs, and the systems that was important for consistent quality. With experience, and as I reflect more, I realise that it’s the people who define the success of a process.
Harnessing the power of people is the one of the biggest challenges faced around the world. People are governed by their emotions, and different people have different levels of understanding. To create a workforce where everyone follows the rigours of the process consistently, and where they understand the impact of errors, is a daunting task.
In any industry, the more the organisation relies on manual power, the tougher it is to be consistent. It is a challenge all around the world, and more so in India because people face more hardships here. Just getting to work is exhausting because of the traffic and the lack of discipline on the streets. It seems unrealistic to expect people to perform their very best at all times at work when people have to struggle just to get to work. I have seen people cutting corners and breaking traffic rules to save a precious few minutes on the road. If people are cutting corners outside office, it is highly likely they would do the same at work too. And that is why it is important to hire the right people; the company that gets their people right is going to be the winner in the long run.
A possible solution to this conundrum is to automate as much as possible. For instance, the automotive industry has automated a lot of their processes unlike the healthcare industry which still relies on people. The highest peaks of success and consistent quality can be achieved by automating as many processes as possible, simplifying processes that can’t be automated and hiring the right people.
M&A Strategy: Things To Keep In Mind
A second panel saw panellists throw light on how they are developing a rigorous M&A (mergers and acquisitions) strategy while also touching upon finer details like how different a beast digital M&A is compared with traditional M&A and what are the considerations associated with buying innovation.
The panellists included Nishant Verman, vice-president and head (corporate development and strategic partnerships), Flipkart; Chandru Chawla, head (corporate strategy, M&A and new ventures), Cipla; Sundareswaran S., executive director, Morgan Stanley; Saugata Bhattacharya, senior vice-president and chief economist, Axis Bank Ltd; Makarand Padalkar, chief financial officer, Oracle Financial Services Software Ltd; Vivek Gupta, partner and head (tax M&A team), KPMG; and Sridhar Gorthi, partner, Trilegal. The discussion was moderated by Shrija Agrawal, national deals editor at Mint. Edited excerpts:
How does India’s top consumer internet firm think about M&A? You just raised a huge round of funding from SoftBank, are you preparing a war chest for acquisitions?
Verman: We are in an industry which is arguably 10 years old. E-commerce interest is just 2% right now but we believe that at some point this 2% will become 20. We have to think as to how should we accelerate innovation and this innovation can take the shape of some core capabilities or consumers. We work backwards from saying what a customer needs, what innovation will be required. Today when I look back, between the three group companies, we have about 65-70% market share. If you see how many consumers are buying online today and if I were to increase the number of customers that are buying online then I have to work in a way to make them buy more things online. There is an infrastructure layer, which makes the buying behaviour of a customer smoother and faster or quicker whether it is category expansion like grocery.
I need to think how we work in these areas (category expansion), and what are the capabilities that I might need. As to new customers, we are looking at both urban and semi-urban market. Eventually, all of India should buy from us. There are people who have access to customers and have a relationship with customers that we don’t have and we need to be faster to do something about that. When it comes to infrastructure and logistics, we continue to look at what others are doing and maybe partner with them. Wherever we see innovation in infrastructure and core capabilities, we will continue to buy.
What about Cipla’s M&A strategy? You recently stepped up your game with acquisitions in the US?
Chawla: Cipla has been transforming itself to become more innovation-oriented, more geographically diversified and also to take a jump in the US market where unlike our peers we were a bit late to enter. So it called for a bold and large inorganic move which we have completed. The external world seems to be positive as we took the right move. We are not in the fashion industry where we should be looking at what we do every other day. Firms like us, based on the old world of brick-and-mortar model, we have to think long-term and stay focused. The focus has to be our key mantra for the coming five-seven years.
For us, the US will still remain a big growth driver. There are tidal waves in the US at the moment. The timing was a little bit surprising. There is a lot more consolidation to happen. Health budgets are under serious pressure. The kind of mercenary and credit pricing that was quite phenomenal in the US won’t be possible in the future. But for companies like us, there are ample opportunities to climb up the value curve in a more innovation-oriented model without relying on the business models of the past. For companies like us, the basic model was copying the generic medicines. It had a copy-cat mindset which is different from an innovator’s mindset. You cannot incubate a company like Google or Facebook in a company like Infosys. Five years ago we created New Ventures which was like an internal incubator. The new things that we want to do require a completely new ecosystem. We started doing that in a unique way by sequestering it from the mainstream. Consumer health is a great example and we realised that it is not a pharmaceutical game, but rather a fast moving consumer goods (FMCG) game. Pharma company is more front-ended in a way that it gives returns on investment. An FMCG company, on the other hand, is more back-ended. We invited private equity to invest; that went well. Consumer health, creating an innovation-oriented business in the US and consolidation in India in a big-bang emerging markets are our key growth driving factors.
Consumer health, creating innovation oriented business in the US and consolidation in India in a big-bang emerging markets are our key growth driving factors.– Chandru Chawla, head (corporate strategy, M&A and new ventures), Cipla.
Could you break down the good, the bad and the ugly for us and what corporates should factor in when making investment decisions?
Bhattacharya: We are going through a mess due to the goods and services tax (GST) system. That’s a short-term pain which is the ugly pain. But there are lots of goods. As for macros, we are the darling of foreign investors. Global investors are all very bullish on India. The infrastructure is getting better, the government has a vision and they are willing to execute it. The legislative system is improving with the infrastructure, insolvency and bankruptcy laws, GST in particular and Real Estate Regulatory Authority (RERA).
The best parts are some structural shifts that are happening in the system like homogenization and financialization of the system. This includes people moving from cash to digital platforms. The tax revenues of the government have increased as a lot of people are complying with the tax regime and the government has become efficient in spending this money. Our payment systems are the best in the world. There is nothing better in the world than the unified payments interface (UPI)s. However, sooner or later one downside of this digitization is that you will lose on the regular salaried job market. It will be more of a sharing economy but with this comes the marketplace. There are three characteristics of this market-driven economy. One, this is very information-centric, particularly information with a lot of asymmetries. Secondly, more the number of customers you acquire, the more valuable the company is which is the key to the economy. What comes from combining these two is the stickiness that you can induce in your customer base. This can bring changes in the business model that the companies can begin to use to acquire scale. The key focus on short-term profits will slowly begin to dissolve and move further. The focus will now be a long-term capital strategy. That are the key changes you are likely to see in the next 10 years.
There is so much capital available out there. We have SoftBank Vision Fund, Canada’s CDPQ, CPPIB and other private equity players investing too much capital in too few assets. Is Canada the new Japan? What is your take on this?
Sundareswaran: There are new pools of assets. There is a diversification of assets. Sovereigns funds come from all parts of the world. The pools of capital have become large from what it was. People are no longer really dependent on asset managers. People are willing to take direct investments. In terms of chasing the sectors, there will be a moment at times where one set of sectors will be more attractive than the others. In general, we feel that we are in a zone where growth is going to be strong.
Give us a sense of what you are seeing in the information technology (IT) sector right now? Oracle has been a very prolific acquirer globally but not in India?
Padalkar: IT sector as of now is full of M&As both of shape and size. In this particular sector, a lot of intangibles are needed and this is one of the challenges in this sector. There are expectations of growth as we move forward. The second problem in IT is to determine a good valuation model for innovation. The third problem in IT is with people because while we all say that we make IT independent of people but in practice, it is not true. People suffer structural change when an asset is acquired. Ability to assimilate new talent and not let them go is another key factor which is taken into consideration. Fourth thing which happens in IT is that most of the acquisitions are done at a slightly green field or an advanced stage and therefore the capital required to make it successful is a difficult game. The challenge comes when there is not so much appetite for capital funding in an organization for an M&A. At a firm level, the decision of M&A, we take at a global level. We look for global footprint and not region specific. In India, there are no core IT assets available.
IT sector as of now is full of M&As both of shape and size. In this particular sector, a lot of intangibles are needed and this is one of the challenges in this sector.– Makarand Padalkar, CFO, Oracle Financial Services Software Ltd.
As a tax expert, if you could give us a sense of evolving tax laws in M&As which corporates should be cognizant of in the near future?
Gupta: Historically, we have been in a tax environment where largely we have followed a rule-based approach as to how we structure our taxes. Fundamentally, over the last three or four years, an overlay of substance norm is coming in. Ten years ago, lots of firms migrated ownership from India to overseas and to do that now under the current tax regime is far more challenging. Externalization was very simple 10 years ago but now the rules have been changed. We are now in a regime, where we are transitioning perhaps from a rule-based law to a substance-based law.
Give us a sense of how deal-making has evolved in the country. There is so much of talk around consolidation, tomorrow if Uber were to acquire or merge with Ola, which is not far or a distant possibility, will that be considered monopolistic by Competition Commission of India (CCI)? How are they looking at these transactions? We saw CCI setting the stage for Lafarge to sell some of its India assets to consummate its merger with Holcim?
Gorthi: From a legal adviser’s perspective, deal-making has evolved structurally almost unrecognisable from a decade ago. The environment is in a stage of transition. Structural changes like bankruptcy code, RERA, all these changes how they will play out is yet to be seen. The answer to your question of Uber acquiring Ola is little surprising. If this thing happens it will have a monopoly in the market and will have a massive market share but some of the mega-mergers, the experience has shown that the CCI is the most pro-active and facilitative regulator. The competition regime when first came in through and CCI was put into play, merger control became a thing. The first concern for many of us had that it is going to be a bottleneck and will slow down the pace of M&A. The actual experience, however, is different. So often if you see large transactions which require approvals from a number of different regulators, CCI has become an interactive facilitator in giving guidance. They have the power to disallow the transactions and internationally this happens very often. They have been facilitative in a few transactions. So Ola-Uber merger or an acquisition is likely to run more into difficulties on government policies for aggregators rather than monopolistic.
Vivek, if you can throw some light on how the present dispensation is trying to create a positive environment for investors? Has abolition of foreign investment promotion board (FIPB) proven to be a good move or a bad move?
Gupta: The intention is all correct and in the right direction. The government has come out with the guidelines for e-commerce and foreign direct investments (FDI). A lot of sectors have been opened up for investment. It is too soon to say whether clearances will become easier or not. Many applauded the abolition of FIPB. As per our interaction with FIPB for the past five to seven years, it was actually a body that got together with various parts of government. FIPB provided a forum where the government could take a decision together. They acted as a mechanism whereby the government was forced to respond to the meeting which was held every alternate week and there was a committee which would then take a joint call. I don’t quite know whether putting this power back in the hands of the administrative ministry will hasten approvals or it wouldn’t. I am holding my judgement on whether abolition of FIPB is a good or bad move, although from an intention standpoint, it was a good intent and we should remove bureaucracy wherever we can.
What we are seeing now is domestic consolidation, industry leaders coming together; it is no longer about who is controlling the business.– Sundareswaran S., executive director, Morgan Stanley.
Sundareswaran, as an investment bank, how are the deals in your pipeline looking like; where do you see most of the deals coming from?
Sundareswaran: Historically, we have always done inbound transactions which used to constitute 50% of the overall deal value, but that is changing a bit. What we are seeing now is domestic consolidation, industry leaders coming together; it is no longer about who is controlling the business. We are also seeing inbound interest coming back. Outbound transactions have been selective and therefore mega or large outbound deals would be fewer compared to inbound deals.
What is at the heart of e-commerce M&A which is largely a winner-takes-all market?
Verman: We acquire companies for people. One of the things which we keep in mind is thinking of who will continue to stay with us. We have hundreds of millions of customers and we don’t spend on marketing anymore. So if we acquire someone it makes sense on making them continue. Myntra is a good example. We let them build their own brand. One of the core areas for our M&A strategy is ‘category’, where we think what are those categories which we have tried to build or where do we get acceleration in six-nine months. Today, we do have a strong customer base and we would acquire for core capabilities and not for customers. The capital which we have today allows us to be very aggressive. The second area of focus for M&A would be around thinking of how to accelerate profitability.
How are you using Big Data for your M&A decisions?
Verman: Data is at the heart of what we do. As a digital platform, we have the ability to see a customer’s behaviour. With data, we can keep a track of customer behaviour changing over time and that builds into a firm’s strategy. We acquire in areas where we see a gap in the product roadmap.
This article originally appeared in Live Mint.