McLeod Russel is in the eye of a storm. The stock yesterday hit the 5% LC at Rs.14.25 and today it opened at the 5% LC at Rs.13.55, its new 52-week low.
The company announced its earnings yesterday and the Auditors had some adverse qualifications to make. The auditors have stated that the company has actually understated its losses as it did not make provisions for the advances made to the promoters.
The Auditors stated, “During the year, the company had extended advances aggregating to Rs. 84,175 lacs to I certain promoter group companies, as capital advances. The promoter group compares to whom such advances were given have substantially lent these onward to another promoter group company. Of the total capital advances, Rs. 77,575 lacs was converted to Inter Corporate Deposits (lCD) as of 31 March, 2019. With respect to the grant of capital advances which were converted to ICDs at the year end, considering the financial condition of the parties to whom these amounts were given, consequent to which interest income has not been fully recognised and since the balances are unsecured, these are prejudicial to the interests of the company and the initial recording of these amounts as capital advance was reflected only by .book entries.”
It went on to say, “As at 31 March, 2019, ICDs of Rs. 174,468 lacs given to promoter group companies and other companies [including Rs. 77,575 lacs referred to earlier ] and Rs. 7,703 lacs interest accrued on such ICDs (net of provision of Rs. 8,509 lacs), respectively, are doubtful of recovery considering the financial condition of the promoter group companies and the other companies to whom these ICDs have been given. However, the company has not made any provision for the outstanding amounts recorded as ICDs and interest accrued thereon. Consequently, the non- current portion of loans and interest accrued thereon are overstated and loss for the year is understated by Rs. 182,171 lacs.”
The management has replied to this qualification, stating, “Promoter group level restructuring is underway to monetise assets to meet up the liabilities of those companies including these ICDs. The management believes that the outstanding dues shall be recovered/adjusted and no further provision is required at this stage.”
The market, at this point, does not believe the management. On 1st June, the company missed repayment of debt, following which ICRA downgraded its long and short term debt to default. And it was in this week only that Eveready, a group company’s auditor, PwC, stepped down over similar financial irregularities.