Cans are filled with milk at a filling station. (Photographer: Dario Pignatelli/Bloomberg)

Can Kwality Stem Its Downward Slide?

In just one quarter, Kwality Ltd.’s revenue fell by three-fourths, it reported a loss that’s three times its sales, defaulted on debt and tax payments, had proceedings to attach accounts initiated against it and was dragged to the insolvency court. Not just that. It faced a forensic audit and its auditor resigned citing “non-sharing of information”.

The maker of dairy products reported a loss of Rs 951 crore in the quarter ended September, according to its exchange filing. That compares with a profit of Rs 21 crore a year earlier and Rs 1 crore in the previous quarter. Revenue plunged 79 percent year-on-year to Rs 351 crore.

Troubles of the company aren’t new. Investor concerns over its weakening financials have wiped off 93 percent of its market value so far this year. Concerns largely stem from its debt. It spiked in the first half of the ongoing financial year to Rs 2,305 crore, with Rs 1,867 crore contributed by current liabilities. That’s because the company now takes 178 days to collect payments—trade receivables—as of September compared with 82 days a year earlier, according to BloombergQuint’s calculations. As a result, Kwality was forced to borrow more for the short term.

Can Kwality Stem Its Downward Slide?

For the second quarter, the loss was driven by the company’s other expenses of Rs 896 crore—of which Rs 761 crore was a credit note issued to debtors to settle pending disputes and Rs 102 crore was written off from the debtor’s balance.

The company which had trade receivables of Rs 1,595 crore as of September is in the process of assessing further requisite provisions for doubtful debts/adjustments, according to its auditor’s limited review report.

The report states that pending outcome of the forensic audit and assessment by the management it was unable to conclude the impact on company’s statement, cash flow and operations. The auditor gave a qualified opinion on this regard.

The company has yet to respond to BloombergQuint’s emailed queries.

Spate Of Resignations

Troubles at the Delhi-based company came to a head in October. Its chief financial officer and auditor—MSKA & Associates— resigned in succession in nine days. The CFO resigned on Oct. 27 with immediate effect, while the auditor quit on Nov. 5 highlighting larger problems.

The auditor’s letter, as per the website of the Ministry of Corporate Affairs, referred to its discussions and communication with the company’s management and audit committees to seek information on matters highlighted in its report dated Oct. 29. It also sought the committees’ help to resolve the impasse over non-sharing of information.

“Under the circumstance we’re constrained to continue as auditors of the company in compliance with the standard on auditing issued by institute of chartered accountants of India.”

The company’s second quarter results were audited by newly-appointed auditors, who in the last fiscal, were its internal auditor.

Insolvency Proceedings And Forensic Audit

The financial statement mentions about the company’s inability to meet its financial obligations in full, including repayment of loans and interest in the quarter. This led to lenders classifying it as a non-performing asset. The consortium of its lenders had also initiated a forensic audit.

Two lenders filed a petition with the National Company Law Tribunal to initiate corporate insolvency under Insolvency and Bankruptcy Code, 2016.

Prosecution And Attachment Of Bank Accounts

The auditor’s limited review report mentions that the company had an income tax liability of Rs 184 crore, including Rs 179 crore income tax payable for earlier years, that was unpaid.

Kwality’s management, however, cites expansion of its new manufacturing plant Softa village, Haryana and working capital requirements as reasons for the delay.

The company’s half-yearly report states that it has received notices for attachment of bank accounts and prosecution due to non-payment of taxes for assessment years 2016-17 and 2017-18.

However, the company’s management, according to the new auditor’s limited review report, is confident of continuing operations.