A Container ship seen sailing. (Photographer: Dana Smillie/Bloomberg News)

L&T Shipbuilding’s Auditors Raise ‘Going Concern’ Doubts

Multiple years of losses have substantially eroded the net worth of engineering major Larsen & Toubro Ltd.’s (L&T) shipbuilding arm and led its independent auditors to cast significant doubt over whether the company can continue as a going concern.

L&T, however, said its investment in L&T Shipbuilding is strategic and affirmed its financial support.

In accounting parlance, the going concern assumption typically means that the company will remain in business for the foreseeable future without being forced to halt operations and liquidate its assets.

“The company's current liabilities exceeded its current assets as at the balance sheet date. These conditions indicate the existence of material uncertainty that may cast significant doubt about the company's ability to continue as a going concern,” M/S Sharp & Tannan, the auditors, said in the 2016-17 balance sheet.

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They added the company, which is 97 percent owned by L&T, with the rest of the holding being with Tamil Nadu Industrial Development Corporation, incurred significant cash losses in 2016-17 and the financial year preceding that, resulting in substantial erosion of net worth as of March 31, 2017.

The company’s losses narrowed to Rs 348.34 crore in 2016-17, compared to Rs 711.71 crore clocked in the previous financial year.

The negative net worth, however, widened to Rs 829 crore in the financial year ended March 2017 from the Rs 341 crore registered in the year-ago period.

It was, however, not immediately clear if the recently concluded financial year has seen any betterment of fortunes for the company.

When contacted, an L&T spokesperson said it continues to support the arm's balance sheet to remain viable financially. This is because for L&T, defence shipbuilding (warships and submarines) is a core business and the shipyard is a strategic asset for construction on these platforms, he said.

“L&T launched 11 warships and delivered 10, all ahead of time in the previous financial year,” the spokesperson added.

In its report, the auditor said the management is satisfied that there are “no events or conditions that may cast significant doubt on the ability of the company to continue as a going concern”.

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On what the future holds for the shipbuilding arm, the L&T spokesperson said besides the bids in the pipeline for construction of landing platform docks, there would be some new opportunities in defence shipbuilding like new generation missile vessels, pollution control vessels, multi-purpose vessels, cadet training ships and next-generation corvettes.

The auditor also flagged concerns over an excess reliance on the parent for revenues, saying the parent contributed 69 percent of the Rs 621 crore pie.

It also stated that the company, whose borrowing in 2016-17 went up to Rs 3,306 crore from the Rs 2,882 crore in the year-ago period, did not avail any credit ratings.

The company has not defaulted on statutory payments arising out of meagre borrowings from financial institutions and bank, the spokesperson said.