ma transcript

Interviewee: Shuja Ahmed

Company : Unitas Client Advisory(Dubai based
firm)
[Speaker 1]
Do you guys know about asset management companies?
(Speaker 3)
I have no idea.
(Speaker 1)
Basically what my company does, I'll take you step by step. So basically we are an asset
management company. What we do is we collect money on behalf of people and then
invest it in different asset classes. So those asset classes are ranging from high risk to low
risk and these are defined as the stock market, the bond market.

These two are the basic asset classes. Stock market is considered as high risk because if for
example, you invest $1000 in the stock market, there is a chance that it can come down to
$500 because of the losses that you incur and it can also go to $1500, so there is a chance of
profit and loss both.

Hence, it is considered high risk. In the bond market, the bond market is considered as low
risk because there is no chance of you losing your money. If you invest $1000, it will not
become $999 or $900 or $500 simply because you are investing in the security papers of the
company.

A government issues a bond. The government is considered to be safe. They will always
make their payments.

They will always live up to their obligations. Hence, it is considered to be safe. A company
issues a bond.

It is considered to be safe. Hence, the bond market is considered to be low risk. What we do
is we collect money from people, millions and millions of rupees and dirhams and whatever,
wherever the office is located.

For example, if it is located in Pakistan, we will collect rupees. If it is in Dubai, we will collect
dirhams. If it is in the US, we will collect dollars.

We take it from them and then we ask them what is their risk appetite. For example, Ahmed
Sadiq tells me that he wants his money to be safe and he wants minimal risk. He does not
want risk.

I will say that, okay, Sadiq, I will invest your money in the bond market. And Aman tells me
that I am risk-seeking, so I want to invest in high-risk securities. I don't care if I incur a loss or
not.
So, I will invest Aman's money in the stock market, okay? So, this is how basically asset
management companies work. Now, you tell me what your question is for this.

[Speaker 2]
Okay, so the first thing is that your approach is for risk management, okay? How do you
consider that into financial planning?

[Speaker 1]
Risk management is the most important aspect. For example, if I talk about the stock
market, there are hundreds and thousands of companies that are listed, okay? Not every
company is good and not every company is bad.

So in considering that I want to make sure that all the good companies are in my portfolio,
so for that I have to assess the risk. How do I assess the risk? I study the financials of a
company over the last 10 years.

I read the financial reports of the last 10 years. I assess their numbers, what was their
revenue, what were their sales, what were their costs, how are their earnings coming. I
assess all these things.

Is their balance sheet strong or weak? Is it, you know, stable? Or there are seasonalities
involved.

So for example, if I see a company that earned 20 rupees in 2015. For example, to put it in
easy terms, let's say a company earns 100,000 rupees in 2015. In 2016, it goes down to
50,000.

Then in 2017, it goes down to 120,000. So there's no stability in the earnings. Okay, they are
going up and down a lot.

This is a risk factor for me. Why is it going up and down so much? Why is there no stability?

I wouldn't mind if it goes from 100,000 to 90,000 and then to 100,000. Then I can
understand the 10% going up and down. But it's going up so much, that's a red flag for me.

That there is no stability in the company. Okay? The second measure is that I look at the
balance sheet of a company and I see that property, plant and equipment are on the
balance sheet.

[Speaker 3]
Yes.

[Speaker 1]
If it's increasing by 5% or 7% every year, that's good. It means that the company is
expanding something. It's putting up new property and plants to expand its operations.

But if it's not expanding, it's decreasing. How does it decrease? It keeps depreciating and
going down.
So because of depreciation, it's decreasing and the company is not doing any capex. So this
is a red flag for me that why is the company not expanding? So these are the two things.

Third is I look at the management. All these things are available in the financial report. So if
you open the annual report, all the directors are on the 4th and 5th page.

Okay? That there are 6 directors of the company. Now I look at each director.

I go to their LinkedIn and I profile them. I say, okay, Aman Butt is the director of this
company. So let's see how many years of experience does he have.

If he is well versed, if you are involved in a lot of good companies and you have experience
of over 20 years and your performance speaks for yourself, then I will say, yes, this is a good
director. So this company is good because they are hiring good people. But if the director is
not good, so I will probably mark it as a high-risk company because their leadership is not
that good.

So this is the third factor in assessing risk of a company. So these are some things that you
can assess whether the company is high risk or low risk.

[Speaker 2]
Second is how do you evaluate the financial impact of a new company or a new initiative?
So how do you evaluate that?

[Speaker 1]
So have you studied about net present value and IRR?

[Speaker 3]
Yes.

[Speaker 1]
You have. So this is what happens. Simple.

You take out the NPV of a project, take out the IRR of a project and see if it's… What is IRR?
IRR is basically my target return.

That I want so much that I get 20% after putting a new project. If my IRR is less than that,
let's say if 18% is coming or 16% is coming, then it is not very beneficial because I am not
getting my rate of return. If NPV is not positive, then it is the biggest red flag.

Net present value is basically the present value of all your future cash flows. So if my future
cash flows are not that good, then there is no point in putting up a plant or expansion or
that sort of thing. So NPV and IRR are your two main factors.

You can go into other things after that. For example, payback period, discounted payback
period, but those are secondary. The most important are NPV and IRR.

[Speaker 2]
Then the second thing is, I think you have answered it, what are the financial metrics that
you consider should always be good for the company?
[Speaker 1]
Revenue. See that your costs are… See, there should be growth in revenue.

Do you know about CAGR? Cumulative Aggregate Growth Return. It's basically on average.

So for example, CAGR is basically on average. In 5 years, in 5 years, in 1 year it will be 20%,
in 1 year it will be 18%, in 1 year it will be 17%, in 1 year it will be 25%. What CAGR does is it
averages everyone and gives me 1% that on average in 5 years, there has been a growth of
15%.

So revenue growth is the first metric that I look at. Gross Margin. Do you know what gross
margin is?

Gross Profit Upon Sales. Gross Margin is the most important metric. In this, we get to know
that on an operational level, how is the company performing.

So there is revenue, there is gross margin, there is EBITDA. And then finally your net profit
margin.

[Speaker 3]
One more thing I would like to ask is that you are considering other companies. For your
own asset management company, do you consider the same financial metrics to see if the
company is doing well or not? To measure the health of the company.

[Speaker 1]
If I talk about the asset management company, I look at the growth in the number of clients
every year. That's an important metric. If my number of clients is the same, then I am not
growing.

[Speaker 2]
The second question is that how do you prioritize financial resources with multiple people
asking you to purchase shares? How do you decide which company to give which share? On
what basis do you decide?

[Speaker 1]
How do you tell the clients?

[Speaker 2]
How do you distribute?

[Speaker 1]
See, this is solely to my discretion. I don't ask the clients. Generally, asset management
companies do not ask the clients where to invest.

The reason is that they don't have the expertise. I do. If someone is coming to me, he
doesn't know where to invest.

If he knew, he would have invested directly. So they rely on me. This is solely up to my
discretion where I should invest.
How do we decide? We do it on these metrics that I told you.

[Speaker 2]
Can you provide an example? Did you use a financial forecasting method? Why did you use
it specifically in an event?

[Speaker 1]
When we invest in a stock or a company, we buy its shares. So we need to do its financial
modeling. Financial modeling is that you forecast the next 5 years.

Then you come at the free cash flows of the company. What is the revenue? What are the
earnings?

Then you discount back the share price. That's your basic financial modeling. There are two
ways.

One is the Margin Based Model. Margin Based Model is that you take the growth of the past
5 years. The past growth.

And then you assume the growth of the next 5 years. So if the company has grown 5% on
average in the past 5 years, then I will take 5% every year. This is your revenue.

How will be the cost of sales? You see what was the gross margin in the past 5 years. For
example, if the gross margin was 20%, then I know that 80% of the revenue is COGS, Cost of
Sales.

And 20% is Gross Profit. So this is my income statement. 3 line items are here.

Revenue, Cost of Sales, and Gross Profit. Now let's come down to expenses. In expenses, I
look at the last 5 years.

I look at each expense as a percentage of sales. So if there are salaries, depreciation, bad
debts, all these things are there, let's take them as a percentage of sales. And the
percentage that is coming on average, let's forecast it for the next 5 years.

So your next forecasting is done.

[Speaker 3]
Do you do the exact same thing for your company? The asset management?

[Speaker 1]
Yes. Yes, I do this on a majority basis.

[Speaker 3]
Because if you have to look at your company, if you have to do financial forecasting, what
will happen in the next 5 years, you still do the same.

[Speaker 1]
In our company, we have a little more detail. If I know that I currently have an HR number of
50 people, that I have hired currently, and I have to add 50 more in the future, then I know
that I will divide it by 10 in the next 5 years, so next year it will be 60, then 70, 80, 100, so I
will increase it accordingly. But mostly it happens that I take it as a percentage of sales, all
the expenses, and then I multiply them by sales and get them out.

[Speaker 2]
Next question is, how do you stay informed about financial regulations and how can they
affect your company? Or how can they affect your work?

[Speaker 1]
You have to keep in touch with the SECP in Pakistan. They keep telling you about all the
regulations of the companies. Once you are in the industry, you make contacts, and then
they also directly tell you.

You get it in the news. The SECP, the Securities and Exchange Commission of Pakistan, they
send you a direct letter that we have made these changes in the regulation. So we get
informed by them, and then we act accordingly.

[Speaker 2]
If you have invested in a foreign company, and there is a regulation change in the resident
country, how do you know about it?

[Speaker 1]
They tell the foreign company. That company then tells us.

[Speaker 2]
Okay. Then, how do you assess the viability of potential investment for your company?

[Speaker 1]
The answer will be the same as the matrix that I told you. They check the viability on the
whole matrix.

[Speaker 2]
Okay. Okay. So, have you ever been in a situation where you had to make a financial
decision in a limited time?

So, what do you focus on at that time?

[Speaker 3]
And how did you handle it?

[Speaker 1]
Yeah, it's a very vague question.

[Speaker 3]
Has there been a specific example that you have ever been in a situation where you had less
information, but you had to make a financial decision quickly?

[Speaker 1]
No, because if there is less information, it's stupid to make any sort of financial decisions.
[Speaker 3]
Because it is necessary in asset management, that the information is complete. Okay.

[Speaker 2]
Okay. Okay. What strategies do you use to ensure that the company meets its short-term
and long-term financial goals?

[Speaker 1]
Yeah, it's simple. You have to break down your goals to the day. What you have to do this
day, this week, this month.

And once you are taking the right boxes every day, eventually, you are moving towards your
long-term goals as well. So, just making sure that everything is broken down to the day, to
the hour. And then if you keep following it, you reach there.

[Speaker 2]
Let's say, you missed steps in this. Like, you didn't achieve it today, you didn't achieve it the
next day. There was a little slump.

So, how do you cope up with it? How do you fix it? How will you fix this problem?

[Speaker 1]
If it's something external, if it's something because of external reasons, that was not in our
control, you inform the management that this is a setback that we had to face. And then
accordingly, we are revising our goals now. We are changing our goals a little bit.

If it's internal, it's because of us. So, then we work and put in some extra hours and make
sure that we are again back on the track. So, this is how basically we can achieve this.

[Speaker 2]
Okay. Okay, so, how do you handle financial, decisions that deal with ethical dilemma?

[Speaker 3]
Look, you have to consider the, the place you are in.

[Speaker 1]
You are in Pakistan. If you are in Pakistan, there are a lot, there are a lot of things that you
can get away with. Okay.

There's a lot of insider trading going on in Pakistan. There are a lot of companies that do not
follow regulations. So, you find your way around it.

Okay. If it's unethical, but it's not there in the regulations, I am going to do it. If there is no
law, I don't care.

I have to follow the law only. So, that's why I don't understand ethics and unethical. I try to
follow.

I try to make sure that the law is being fulfilled.

[Speaker 3]
You have just said that the law is being fulfilled for the interview.

[Speaker 2]
Okay. So, tell me one thing, can you tell us about a time when you have made a financial
decision, somewhere in the world, and it did not reach your expected outcome. how do you
handle it in that situation?

[Speaker 1]
Look, you have to understand that it doesn't happen that one day I woke up and I found out
that I had a loss. The indicators that you have, you start to see them, a long time ago. Okay.

So, if I made an investment somewhere, I have to constantly track it. Even though my target
is that I, for example, I made an investment in a company, after a year, I need 25% return on
it. But, three months down the line, I figure out that, it won't be able to give me 25% return.

So, gradually, I try to communicate this with the management and with the investors. I start
telling the clients as well. 3 months, 4 months, 5 months later.

And I start telling the management as well that we might not be able to reach our goals.
Because, the said company has not performed accordingly. And that can be due to multiple
reasons.

It can be due to the company's own performance is very bad. External macro economic,
macro economic environment is not very good. So, there are a lot of reasons, you tell them
that, this company or this investment has not done well.

Because the macro economic environment is not good. To quote for example, interest rates
in Pakistan were 7%. Which means that, the companies and the businesses were thriving.

Right? They used to get loans at a very low rate. their cost was not that much.

Their interest expense was not that much. Now, suddenly, it's at 22%. From 7 to 22%, there
is a difference of 15%.

So, suddenly, their interest expense has increased a lot. Because of this, their profits have
decreased. So, this was the, macro economic situation.

So, we informed our managers and our investors that, we might not be able to achieve our,
desired target return.

[Speaker 3]
Right. Leave 14%. Leave 15%.

[Speaker 2]
So, how do you deal with your, budget shortfalls or unexpected financial demands, in the
company or, in the market?

[Speaker 1]
Look, budget shortfalls do come. But, they are not that much. You keep a, buffer of, plus
minus 5%.

Right? It's possible that, your budget exceeds 5%, and it's possible that, it increases less than
5%. So, this happens.

This is very normal. But, if it's exceeding 5%, then, questions arise. Which means that, you
haven't planned well.

So, plus minus 5% is fine. You keep a buffer of that. If it's more than that, it means that,
there is a problem in your planning.

It hasn't happened to me yet, that, it has exceeded 5%. In fact, we try to keep it at 2-3%. So,
it gets managed.

[Speaker 2]
And, tell me that, how do you manage, financial stability, as, and you know, the desire to
invest as well. Invest for growth. How do you maintain, both of them?

So, that your money stays, and your investment keeps growing.

[Speaker 1]
To not be greedy, would be the simple answer. Because, there are times when, when
everything looks, very attractive. You feel like, putting in some more money, putting in some
more money.

But, you have to understand that, now this is fine. You have to keep, some cash, as a
reserve, for yourself. And, invest as much as you had planned, no matter how, good, the
market is performing.

So, this is one thing. And, the second thing is, knowing when to sell. A lot of people, achieve,
let's say my target was, to achieve 25%, and I achieved it.

But, I see that, I still see, growth chances. So, this means that, I moved away from my
planning. I became greedy.

I became a little greedy. I said, let's not sell, let's earn 30-35%. So, this is wrong.

You have to understand that, once you achieve your, target rate of return, you sell, no
matter what. So, these are the two most important things.

[Speaker 2]
Okay, so, one of the things I believe, every business faces, is cost cutting. Which is
happening right now. So, how do you assure, that this does not negatively, impact the
companies, and its operations?

[Speaker 1]
No matter, what anyone says, and no matter, what they try, this, does affect, a company
negatively. No matter what you try, employees get a little demotivated, for the time being.
They are looking after their shoulder, that next, it's not my turn.
So, a period of, instability is not there, but, slightly demotivation, comes, suddenly, because,
people become a little insecure, that tomorrow, they will fire me. What, you have to do, one
of what I, can do, or what we collectively, will do is, make sure that, you tell them, those
who have been, let go, have been because of a reason, and you have stayed, because you
were doing good. So, if you continue to keep the, the work that you were doing, so you will,
be fine.

But, if a constant period of, under performance comes, then there will be a problem. Which
is, only natural. If an employee, is not working for me, again and again, then I will have to
fire him.

[Speaker 3]
Okay.

[Speaker 1]
Okay.

[Speaker 3]
15 questions, about financial technology.

[Speaker 2]
Okay, you guys, which softwares, do you use, which financial technology, has become
essential, In decision making.

[Speaker 1]
Look, there is, there is, CRM, there is Python, there is Power BI, and then, there is MS Office,
Excel, PowerPoint, that's it.

[Speaker 3]
How do you use Python?

[Speaker 1]
Python is basically, helpful in forecasting. So you enter the code, you tell them, that this is
what you are, looking to achieve, and then it will, forecast everything for you.

[Speaker 2]
Okay, and with this, innovation of AI, so are you, moving away from these, or will you still
stick, to these only, because these are reliable.

[Speaker 1]
From what we have tested, so far, I think we are going, to stick with it, for some time. There
are, there have been, some, resources, which forecast you, and give you, but in that, our
experience, was not that good, because, either they were not, very good forecasting, or,
there were a lot of, changes that had to be made, in that. So for now, we are sticking with
this, but, you never know, there is a very high chance, that we will move, towards AI.

[Speaker 2]
Okay, and I think last question, I believe is, that how do you communicate, the complex
financial decisions, that you have made, to you know, your stakeholders, to those that don't
actually know, anything.

[Speaker 1]
Yeah, you have to, make them understand, like you are talking, to a five year old, because
financial jargons, can be very tricky, but, not everyone understands. So, you have to, take it
very basic, that, you have to explain, that what is revenue, so explain that too. But, make
sure that you sit, with them, collectively, like what we do is, we have an investor, briefing,
where, all the 30 investors, came on 30x30 zoom, if they are not doing live, I mean if they
are not, doing in person, so they came on zoom, and then explained to them, that this is
what the company, has achieved.

First explained in their own words, calmly, and then you open, the floor for questioning, so
all their questions, whether they are, kids or adults, answer them all, that's how you can,
make sure that, you make them understand, as simply as possible.

[Speaker 2]
I think we are done. Thank you. Thank you so much.

[Speaker 1]
Okay bro, no problem. Thank you.

[Speaker 2]
Allah Hafiz.