managing risk in - enl group · business risks 2017 as per allianz risk barometer and (ii) ‘guide...

Managing risk in delivering our strategy

“Effective management of risks enables the Group to enhance its decision-making process to deliver on its strategic objectives and also, keeps us informed of emergent downside risks as well as opportunities.”Simon-Pierre ReyChairman of ARMC

Managing risks and strengthening our risk culture1How did our principal risks evolve from last year?2Governance structure and framework to manage risks 3Our risk profile Upside and downside risks 4

BUSINESS REVIEW | RISK MANAGEMENT

3131ENL Commercial Limited | Annual Report 2017


1. Managing risks and strengthening our risk culture

The success of any business rests on effective strategic planning and execution as well as proper management of risks and uncertainties. The year ended 30 June 2017 was a turnaround year for ENL Commercial and its subsidiaries (referred as ‘ENL Commercial’ or ‘ENL Commercial Limited’ or ‘the Group’) and was marked by the upturn of performance of the Group’s business units. The measures initiated and sustained by the Group over the preceding years are gradually yielding operational dividend pay-out. In spite of challenging conditions, ENL Commercial’s focus is geared towards having agility in operational execution and ensuring an attractive value proposition for customers.

With improved financial results, there is no denying that ENL Commercial has made significant progress in mitigating its key operational and financial risks, i.e. higher turnover, cost controls, improved operational efficiency, restructuring debt of the Group through the innovative CIPF transaction (Commercial Investment Property Fund Limited) are few ones to mention. Further details of the key risks faced by ENL Commercial are outlined in sub-section 2 of the risk management section.

Taking risk management beyond compliance

Effective and sustainable risk management rests on a well-entrenched ‘Risk culture’. The Group’s philosophy and importance given to risk management together with the various initiatives undertaken over the years demonstrates the drive of the Board and Senior Management in taking risk management beyond compliance. A strong ‘Risk culture’ together with the right tone at the top of ENL Commercial’s Senior Management contribute in ensuring that business units perform effectively and sustainably thus, preserving and creating value for stakeholders.

Keep us out of trouble Make our business better

Manage risks to preserve value Create value

Balanced approach to risk and performance

Source: adapted from Ernst & Young - ‘Building an enterprise approach to risk and performance’

Enhancing risk management is a journey; initiatives taken to embed risk management as an integral part of strategy and business operations coupled with regular review of risks by entities of the Group helps in escalation of risk information to Line managers and ultimately to Senior Management for effective decision-making. Over the year 2016-17, the Group deployed several measures which contributed in strengthening risk awareness and risk culture.

32 ENL Commercial Limited | Annual Report 2017


Embarking on the new 3-year plan, Vision 2020

The end of the year for ENL Commercial also marks the beginning of a new 3-year plan. The Group is getting ready to boldly take up the strategic challenges of Vision 2020, placing at the heart of its plan its key enablers being: Customer centricity, Innovation, Operational efficiency and Management commitment.

The strategic enablers will spur the Group in a new era of performance while at the same time, capitalising on the effective management of principal risks to drive operations.

Sharinginsightson risk

Workshopsand exchange

sessions Risk reporting

& oversight

To the ARMC members, C-suite team and Management of the Group on (i) Top Business Risks 2017 as per Allianz Risk Barometer and (ii) ‘Guide to Cyber risk’ published by Allianz.

Introducing an in-house newsletter referred to as ‘Insightful feed’ intended to share trends, global news and issues related to risk, opportunities and assurance.

Facilitating ‘risk awareness’ and ‘1-to-1’ sessions with the Management teams of the BUs as a refresher to sustain importance of effective management of risks.

Conducting ‘Fraud and corruption awareness’ workshop with the Leadership team and ARMC members facilitated by ‘ENSafrica (Mauritius) law �rm’.

Conducting mini-workshop via our in-house ‘Learning bytes’ forum on IT security with the Leadership team of the Group’s entities.

Introducing a ‘Risk Management Dashboard’ for Senior Management and ARMC members of the Group highlighting the Top 10 key residual business risks, risk trends and potential upsides of BUs.

Linking of risks to business objectives in the Group’s enterprise risk management framework to ensure risks and strategy are aligned.

Periodic review of ‘risk management registers’ of the Group’s BUs with the support of the GRC function at the group.

01Managing risks and strengthening our risk culture

“Enterprise risk assessment provides us insights and priorities regarding our key existing and emergent risks thus, enabling the Group to ensure that effective mitigation mechanisms are embedded within our operations to sustain performance and value-creation.”

Eric Espitalier-Noël, CEO, ENL Commercial


2. How did our principal risks evolve from last year?

The main risks of ENL Commercial, as at 30 June 2017, are highlighted below. The table provides a bird’s eye view of how risks are linked to the strategic enablers set by Vision 2020 as well as the risk trend as compared to the last financial year. Accordingly, stakeholders and investors are encouraged to consider these risks and take cognisance of mitigating strategies in place to manage same. More details are in sub-section 4 of the risk management disclosures.

Strategic enablers Risk category Principal risks Risk trend

(Change from last FY)

Client centricity

Strategic

Market conditions and economic factors

Competitive environment

Customer attractiveness and retention

Operational efficiency

Financial

Financial performance sustainability

Credit risk

Innovation

Liquidity risk

Risk related to CIPF

Operational efficiency

Operational

Brand performance, retention and suppliers’ exigencies

Inventory management

Management commitmentPeople and

systems

Cyber-threats and IT

HR and employee engagement

Note: The ‘Risk trend’ is based on the current understanding of the risk environment and may change over time given the dynamism of the environment, business and evolving risks. The legend for the ‘Risk trend’ is set out below:

Key :

risk has increased risk has decreased risk has remained unchanged emergent risk reflects position of last year



02How did our principal risks evolve from last year?


Evolving from last year’s ‘Risk heatmap’, the risk profile of ENL Commercial is translated on the ‘Risk radar’ which provides a bird’s eye view of the principal residual risks as mentioned in the snapshot table. The ‘Risk radar’, per below, is divided in four quadrants, i.e., risk categories: (i) Strategic, (ii) Financial, (iii) Operational and (iv) People and systems. The radar shows the likelihood of occurrence of risks, perceived impact as well as how risks evolved as compared to last financial year. As such, risks closer to the centre of the radar are risks that posed the greatest challenge during the year ended 2016-17 and risks positioned further from the centre are those showing lower likelihood of occurrence and impact but are monitored by Senior Management.

The radar is the outcome of the risk assessment process, facilitated by the GRC function, which involved discussions with Senior Management and validation with ARMC members. As such, the principal residual risks identified at the Group level is the outcome of a blend of a bottom-up approach, i.e. whereby key residual risks of subsidiaries of the Group are identified and escalated to Senior Management for actions, and top-down approach which takes on board the key risks at Group level.

Risk radar of ENL Commercial

1Market conditions and economic factors

2Competitive environment

3Customer attractiveness and retention

6 Liquidity risk

11

HR and employee engagement

8 Brand performance, retention andsuppliers’ exigencies

9 Inventory management

5 Credit risk

4 Financial performance sustainability

Strategic

Operational

Financial

People & systems

Cyber-threats and IT

10

Perceived impact

Likelihood

7 Risk related to CIPF


3. Governance structure and framework to manage risks

Risk governance encompasses the tone at the top, strategic decision-making and risk oversight. At ENL Commercial, the risk governance structure in place stresses on the responsibilities of the Lines of defences with regards to identifying, evaluating, responding and monitoring of risks that may impact business objectives, operations and performance. The “Three lines of defence” model is applied to have a cohesive approach to reinforce the effectiveness of the risk governance structure which stands as follows:

Board of directors

• Tone at the top and responsible for the total process of risk management and risk tolerance.

• Takes adequate measures to monitor effective management of risks and sound system of internal controls.

Senior Management Audit and Risk Management Committee

• Oversee implementation, embedding of risk management practices and regular monitoring of entities’ principal and residual risks via risk dashboards.

• Monitor and review the risk management process and internal controls systems with the support of the Governance, Risk and Compliance (GRC) function of ENL who tables the prominent inherent and emergent risks.

First line of defence: Operational management

Second line of defence: Support functions

Third line of defence: Internal Audit

• Accountable to the Board for the design, implementation and monitoring of the risk management processes and ensuring that internal controls are effective and adhered to.

• Risk management and compliance functions monitor the effectiveness of the first “Line of defence” in mitigating the occurrence and significance of risks.

• Independent assurance to the Audit and Risk Management Committee on risk management, controls and governance processes.

Embracing the new National Code of Corporate Governance (2016)

The year 2016-17 also witnessed the launching of the second edition of the National Code of CG for Mauritius (2016), applicable as from the FY 2017-18. The Group embraces the new Code and views it as being a positive step forward aligned with ENL values and upholding of good corporate governance. The new Code brings forward eight basic CG principles and introduces the “apply and explain” concept with Principle 5 of the new Code dealing with ‘Risk Governance and Internal Control’. As such, the Group will initiate a readiness self-assessment of existing risk management practices against requirements of the new Code so as to be better prepared for migrating towards its application.



Integrated Risk Management Framework at a glance

The ERM framework at ENL Commercial underpins the Group’s strategy and enables the identification, assessment, prioritisation, mitigation and monitoring of prominent risks associated with business operations. It provides an overarching approach which looks at the spectrum of risks faced by the Group and more importantly, it provides useful insights for Senior Management and Management on existing risks, emerging risks and key risk inter-dependencies. The integrated framework, as shown below, rests on 3 fundamental pillars namely: Risk governance, Risk culture and People. It encapsulates the key elements of the risk management process.

Risk infrastructure and approach:

Establish the contextand

Risk identi�cation

Assess and prioritiserisks

(existing and emergent)

Mitigate risks(reinforce controls, action plans to reduce exposure)

Risk monitoring(risk dashboards reviewed

to capture trends and controls)

Risk culture Risk governance People

Strategic risks

Operational risks

Fina

ncia

l ris

ks

Peo

ple &

systems risks

Integrated ERM Framework

ENL Group and entities’ applicable policies, procedures, internal controls, code of ethics amongst others and external legislations and regulations

Source: Adapted from Ernst & Young – an integrated approach towards effective and sustainable risk management

The integrated framework facilitates a harmonised top-down approach to effective management of risks across the Group thus resulting in entities of the Group aligning their risk management practices with ENL Group’s methodology. Entities of the Group periodically review their risk dashboards and Risk Management Registers (RMR) to assess evolution of their risks, effectiveness of controls and hence, set priorities on existing and emergent risks that require Senior Management attention.

03Governance structure




Risk appetite

Appetite towards risk is set at the Board level. Risk taking activities are managed within the risk appetite, which defines the amount and types of risks the business is willing to assume in the pursuits of its objectives. Risk appetite is unique to every business and setting the risk appetite takes into consideration factors such as:

o Risk profile of the business in line with its business strategy and its corporate values, i.e., ‘what are the risks inherent to the business and those to be avoided’;

o Risk capacity of the business, i.e., ‘how much risks can the organisation absorb’;

o Risk assessment and analyses: i.e., ‘what is the ranking of risks and what are the boundaries within which Management can operate’.



4. Our risk profile – upside and downside risks

While the term ‘Risk’ is perceived as having undesirable impact on business operations and/or financial performance, risks can also create ‘Opportunities’ for improvement that can make businesses more efficient, or provide a competitive edge.

Upside riskSearch for opportunities

Mitigate negative eventsDownside risk

Upside risks

The Group’s philosophy is to view risk management as a management tool, not only to avoid and mitigate risks that can affect the Group, but also to view risks as potential opportunities that can create value for entities of ENL Commercial. The table below provides a glimpse of three key opportunities seized by the Group during the year.

Lean management initiatives: With increased pressure to optimise costs, the Group’s initiative to review its operations and adopt lean management practices has resulted in desirable gains in productivity of employees, streamlining of operations and bridging efficiency gaps. The positive outcome of this initiative has encouraged the Group to replicate these practices in its subsidiaries in view of sustaining efficiency and profitability.

Nature of risks Upside

Financial restructuring of the Group’s debts through CIPF transaction: The CIPF transaction enabled deleveraging of the subsidiaries of ENL Commercial and allowing entities of the Group to better focus on their operational activities and achievement of their strategic objectives.

Axess, one of the main subsidiaries, took advantage of changes in the fiscal regime, as announced in the national budget 2015-16 to increase its number of new vehicles sold and hence its turnover.

Level of indebtedness and debt servicing

Changes in the fiscal regime governing the motor car segment

Increasing costs of operations

04Our risk profile


Downside risks

The principal risks and uncertainties, as tabled below, reflect the residual positioning of such risks after taking into consideration the

o Risks’ rating: i.e., likelihood of occurrence of risks; and perceived impact on the Group’s operations;

o Risk control measures: i.e., mitigating strategies in place;

o Risk trend: i.e., how the risks have evolved in terms of significance, compared to the last financial year.

The following table captures the risk profile of ENL Commercial highlighting the principal risks faced, mitigating strategies taken and also, outlook of risks.

I. Strategic

The success of the Group rests on effective strategic planning, choices, implementation which encompasses ability to adapt rapidly to evolving customer needs and delivering attractive value proposition to customers. The table below depicts the key residual risks and controls for the subset of risks falling under strategic risks.

(1) Market conditions and economic factors

What is the risk?

Given the commercial nature of business activities, the risk of being subdued by unfavourable market conditions and sectorial downside risks are more than a reality with impact felt on turnover and hence, profitability.

Given that imports are concentrated in USD and Euro, the Group is exposed to volatility in exchange rates (FX) impacting cost of sourced materials and product price competitiveness.

Key measures to manage risks

• Focus on key drivers being boosting sales and customer centricity to ensure that businesses thrive in challenging market conditions, i.e., increase in sales of new vehicles/after-sales at Axess as well as higher sales of swimming pools and eye wear products.

• Bold measures of redress geared towards containing costs, sourcing of raw materials in a cost-effective manner, improving efficiency (e.g. lean management at Axess) and attractive prices and margins are main strategies sustained.

• The wide product/service base and addition of new brands/products in the portfolio are part of the diversification strategy to mitigate effects of fall in consumer demands in localised sectors.

• Close monitoring over treasury management done at the subsidiaries and Group level including natural and planned hedging. to mitigate unfavourable movements in FX

Risk outlook

• Potential changes in government policies and fiscal regimes in localised sectors may be potential threats or opportunities.

• Unforeseen changes in consumer preferences or fall in aggregate demand may impact turnover.

• FX volatility may be accentuated by changes in the Eurozone / Brexit.

Strategic enabler Client centricity



(2) Competitive environment

What is the risk?

The business environment remains very competitive and the Group may be exposed to the risk of not (i) offering attractive products and services, and/or (ii) innovating faster than competitors.

The combined effects may result in erosion of market share and declining financial performance.


• Aggressive marketing (traditional and digital) support businesses in better positioning the extensive array of brands, products, after-sales services to consumers. i.e., gaining turnover such as at Axess, Nabridas, Plastinax confirm effectiveness of the Group’s strategy, planning investment in new showroom facilities to increase visibility of key brands.

• Consolidate market presence by staying close to competitors’ offerings, enhancing service delivery and maintain close relationships with business partners and customers.

• Continuously analyse competitive and market information to anticipate unfavourable changes and adjust the marketing and sales actions.

Risk outlook

• New entrants and fiercer competition are likely to be threats for the business.

• Competitors placing greater focus on digital marketing hence having a stronger appeal and affecting consumer preferences.


(3) Customer attractiveness and retention What is the risk?

Customers are at the heart of the business and thus, the Group may be exposed to the following risks:

• Pricing of products/services not being appropriate;

• Inadequate level of service resulting in poor customer experience.

Impact being non-recurring business and revenue streams.


• Focus set on ‘Customer centricity’ at each level of the organisation to better gauge clients’ preferences, enrich customer experience and increase possibility of future orders.

• Providing high and middle-end product/service offerings at different price-points, either through acquired brands and/or innovation, in line with market trends and customer tastes.

• Sustain diversification of the customer base within different sectors of the local economy as well as foreign-based clients.

• Seeking regular customer feedback to improve customer experience.

Risk outlook

Competitors innovating in their business model to attract new customers as well lowering their margins to obtain market volumes.


BUSINESS REVIEW | RISK MANAGEMENT 04Our risk profile


II. Financial

The table below depicts the key residual risks and controls observed for the subset of risks falling under “Financial”. Details on financial risk management are supplemented in Note 3 of the Financial Statements, on pages 113 to 117.

(4) Financial performance sustainability What is the risk?

The Group’s ability to maintain attractive profit margins can be negatively affected by several factors:

• Constant increases in costs of raw materials and overheads;

• Downward pressure on selling prices accentuated by competition;

• High net indebtedness and associated finance costs.


• The combined effect of several initiatives and measures taken resulted in turnaround of performance, i.e., improved working capital management, cost controls, pricing, gross profit management initiatives, restructuring of business models, enhancing efficiency of operations.

• Deleveraging of entities of the Group and restructuring the Group’s debts through the CIPF transaction enabled the raising of Rs. 560 million of floating rate notes.

• Close monitoring of the performance of BUs by Senior Management with focus on business lines generating more attractive margins and discontinuing non-profitable lines.

Risk outlook

Sustainability of performance and operations is likely to remain a key risk given challenging conditions and fierce competition.

Strategic enabler Operational efficiency

(5) Credit risk

What is the risk?

Risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the group’s trade receivables. The subsidiaries’ credit risk is primarily attributable to their trade receivables.


• Established policies and procedures at entity level with respect to sales to customers and credit management. Credit control functions oversee chasing up and day-to-day management of trade receivables with monitoring done by Management and Senior Management.

• Independent review over trade receivables done by external auditors and ENL’s Internal Audit.

Risk outlook

Credit risk will evolve depending on the sales strategies to be deployed over the new FY.




(6) Liquidity risk

What is the risk?

Risk that the Group may encounter difficulty in meeting the obligations associated with its financial commitments that are honoured by delivery of cash.


• The Group’s entities benefited from the CIPF transaction which resulted in lower pressure on cash flows in the short term and medium term with the extension of the entities’ debt maturity.

• Maintain flexibility in funding by keeping committed credit lines available.

• Monitor rolling forecasts of the Group’s liquidity reserve on the basis of expected cash flows.

Risk outlook

Given the commercial nature of the business involving working capital requirements, liquidity risk is likely to remain a key risk for the Group.


(7) Risk related to CIPF

What is the risk?

Risk that ENL Commercial, as sponsor of CIPF, may be required to make good for commitments as regards to timely interest payments to bond holders of CIPF in event of tenants not servicing their lease rental payments.


• A funded ‘Debt Service Reserve Account’ (DSRA) has been put in place at CIPF level equivalent to one semi-annual interest payment of senior trance of the bonds.

• Close monitoring of the performance of subsidiaries, being tenants of CIPF, by Senior Management thereby ensuring that subsidiaries honour their lease rentals income to CIPF for servicing interest payments to bond holders.

Risk outlook

Risk is likely to remain same given ENL Commercial is the sponsor of CIPF.

Strategic enablers Operational efficiency

Innovation



III. OperationalOperational risks span across the business activities of entities of ENL Commercial and encompass areas pertaining to effectiveness and efficiency of operations, compliance and governance. A snapshot of the key operational risks and the mitigating actions are detailed in the table below.

(8) Brand performance, retention and suppliers’ exigencies

What is the risk?

The Group faces the risk that its brands may not be performing up to desired level thus, exposing the business to potential loss of brand impacting the Group’s performance.

Given the dependency on suppliers e.g. car manufacturers, the Group may be bound by their exigencies thus, putting pressure on working capital. for e.g. new vehicle inventory holding requirements, marketing requirements, performance objectives, service level delivery.


• Performance of brands being closely monitored by BU leaders and Senior Management followed by actionable plans. e.g. (i) sales and marketing strategy being more aggressive to reinforce market attractiveness; (ii) improving service level delivery to encourage retention of customers.

• Maintain close liaison and communication with key suppliers.

• Widening the array of products/services within existing brands and capitalise on trained staff having sound knowledge of branded products/ services.

• Monitoring of working capital, timely and effective sourcing of products, pricing and gross profit management initiatives.

Risk outlook

Challenging economic conditions faced by suppliers at the regional/ international level, if maintained, may be felt by brand representatives in the local market.


(9) Inventory management

What is the risk?

• Risk of high stock holding given the diversity of products, lead time for sourcing of products and minimum order quantity

• Risk of slow-moving and obsolete stock leading to stock write down.

• Risk of having ineffective internal procedures and controls which may entail in unexplained loss of stock.


• Enhanced management controls over procurement. e.g. use of improved tools and techniques in forecasting demands for items and ordering the right quantity.

• Focus maintained on regular identification and review over slow moving / obsolete stock, taking prompt actions to dispose of these items.

• Continuous enforcement of controls over stock like housekeeping, continuous stock-taking procedures, management controls and regular internal audit assurance.

Risk outlook

Inventory management is likely to remain an important risk for the business.




IV. People and systemsThe Group is highly dependent on its people and management information systems for the smooth running of its operations as well as for reporting and decision-making purposes. ENL Commercial, its subsidiaries and associates benefit from support in respect of Human Resource (HR), Business Process (BP) and Information System (IS) from ENL Limited. This also ensures that a coherent and consistent policy/ strategy with regard to HR, BP and IS systems is maintained across the Group. The most significant inherent and residual people and systems risks and the corresponding mitigating actions are summarised below:

(10) Cyber-threats and IT What is the risk? • Cyber threats are more than ever

rampant and expose businesses to (i) paralysis and downtime of operations, (ii) users being locked out of their computers and ransom ware payments requested, (iii) theft/ loss of confidential data and BI.

• Risk of loss of critical and confidential data in the event of IT system failure or theft of data/piracy of electronic devices.


• Raising awareness of end users regarding suspicious emails and attachments, proper custody of electronic data, password protection and management of workstations and ‘bring your own devices’.

• Implementation of business continuity plans and deployment of the IT Framework across the Group are in progress. This will enable attaining the appropriate level of IT governance maturity in line with the IT governance policies and procedures of ENL Group.

Risk outlook

Cyber-attacks worldwide have left undeniable trace that cyber security attacks are likely to recur especially as the world becomes more digitally connected. Cyber risk remains one of the top risks for which businesses may not be prepared.

Strategic enabler Management commitment

(11) HR and employee engagement

What is the risk? The Group may be exposed to the risk of not being able to :• attract, retain and facilitate

growth of its talents to support the company’s strategic objectives.

• ensure high level engagement of staff to deliver higher business performance.


• Investment in training, enhancing skills and knowledge of officials remain priorities of the Group to help them achieve higher productivity and market edge over our competitors. This is aligned to our ‘people-first’ culture.

• Engagement level of employees is regularly measured through surveys and management commitment and action plans are set to increase engagement at entity level.

Risk outlook

Actions taken are likely to result in the risk decreasing going forward.

Strategic enabler Management commitment



Building up the risk maturity At ENL Commercial, efforts and measures implemented in the scope of enterprise-wide risk management (ERM) during the year ended 30 June 2017 further helped in cementing to risk management practices across the Group, i.e., (i) strengthening of the risk culture, (ii) reporting and oversight of existing and emergent risks on a regular basis, (iii) implementation of risk management dashboards and (iv) finalisation of the ERM policy for the Group.

Progressing in its journey towards continuous improvement of businesses and risk management processes, the Group is moving up along the risk maturity curve as shown in the diagram below. Efforts and energy in view of cementing the risk culture are geared to enable the Group to reach an ‘Integrated’ maturity level and would aim in continuously reinforcing the importance of fundamentals in risk management.

Fragmented

Top down

Integrated

Risk intelligence

Initial

Vision 2020

Risk management maturity of ENL Commercial

Stages of risk management maturity

Source: Deloitte. Risk Intelligent series. Creating Risk Intelligent infrastructure. Getting Risk Intelligence done.



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