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Reliance Infra Posts Biggest Quarterly Loss As Auditor Raises Continuity Concerns

Reliance Infrastructure reported its largest-ever quarterly loss as it booked impairment and write-offs worth Rs 8,500 crore.



Anil Ambani, chairman of Reliance Communications Ltd. (Photographer: Adeel Halim/ Bloomberg News)
Anil Ambani, chairman of Reliance Communications Ltd. (Photographer: Adeel Halim/ Bloomberg News)

Reliance Infrastructure Ltd. reported its biggest-ever quarterly loss as it booked impairment and write-offs worth Rs 8,500 crore while its auditor raised concerns over the company's ability to remain in business.

The net loss stood at Rs 3,301 crore for the three-month period ended March, as against Rs 134 crore profit in the same period last year, the Anil Ambani-promoted firm said in an exchange filing today after deferring the announcement twice earlier.

The debt-laden infrastructure company booked a one-time impairment of subsidiary Reliance Naval and Engineering Limited, which it had acquired in 2016. It said the amount -- which it did not disclose -- may be written back upon successful debt resolution pursuant to the updated Reserve Bank of India circular.

Besides that, losses suffered by its another of its subsidiary Reliance Power Ltd. where it owns a 33.11 percent stake, added to the one-time earnings hit. Part of the exceptional loss of Rs 1,741 crore included loss due to the sale of investments pursuant to invocation of pledge, it said in the filing.

Opinion
Auditors Unsure If Reliance Power, Subsidiaries Can Stay Afloat

The company's revenues rose 30 percent year-on-year to Rs 4,012 crore during the three-month period. It's operating profit jumped 234 percent over the same period last year to Rs 888 crore. The margin came in at 22.1 percent versus 8.6 percent year-on-year.

While the company adjusted these exceptional losses directly against its general reserve to soften the blow, its net worth got eroded by 37 percent to Rs 15,866 crore. On the asset side, its investments dropped 47 percent to Rs 6,725 crore.

Reliance Infra said the lack of new orders, operational losses, net worth erosion, and calling back of loans by secured lenders has resulted into financial constraints for Reliance Naval. The shipbuilder is engaged with the lenders to achieve debt resolution, it said.

The company said it is facing financial constraints in three of its toll road projects as well.

At the end of the financial year 2019, Reliance Infra’s current liabilities were Rs 16,050 crore, higher than its current assets. Simply put, it means it wouldn’t be able to clear its short-term dues even if it were to sell all its current assets.

Auditor Concerns

1. Unknown Deposits, Receivables, And Investments

According to the auditor report by its two auditors -- BSR & Co. LLP and Pathak H.D. & Associates -- Reliance Infra has investments and various recoverable worth Rs 7,083 crore. However, the auditors were unable to obtain sufficient and appropriate audit evidence about the relationship of this company with Reliance Infra and the reason behind these transactions. Due to which they were unable to determine the implication that could arise in the future.

In its notes to account, Reliance Infra mentioned that the Reliance group of companies supported an independent company in which they hold less than 2 percent stake to undertake contracts and assignments for a large number of varied infra projects which were proposed and/or under development by the group.

Reliance Infrastructure has provided funds worth Rs 7,083 crore, the auditor report said. In addition, it said, Reliance Infra has provided corporate guarantees worth Rs 1,775 crore to this party.

Neither Reliance Infra nor the auditor mentioned the name of this company.

2. Reliance Power Overhang

Auditors said the depreciation method adopted by Reliance Power did not comply with accounting standards.

Reliance Infra has receivables worth Rs 1,400 crore from the company.

According to the current market capitalisation of Reliance Power, the value of its 33 percent stake is close to Rs 500 crore.

While Reliance Infra made investments worth Rs 5,757 crore in the ailing company, it booked an impairment loss of only Rs 287 crore. There was no impairment booked on receivables.

3. Uncertainties Regarding Subsidiaries And Associates

Auditors also raised concerns eleven of Reliance Infra subsidiaries and associates' ability to continue to run their businesses.

  1. Mumbai Metro One Pvt. Ltd.
  2. Reliance Naval and Engineering Ltd.
  3. Reliance Power Ltd.
  4. TK Toll Road Pvt. Ltd.
  5. TD Toll Road Pvt. Ltd.
  6. Delhi Airport Metro Express Pvt. Ltd.,
  7. BSES Kerala Power Ltd.
  8. Metro One Operations Pvt. Ltd.
  9. RPL Photon Pvt. Ltd.
  10. RPL Sun Technique Pvt. Ltd.
  11. RPL Sun Power Pvt. Ltd.

The auditors said a ‘material uncertainty’ exists that may cast significant doubt on the Reliance Infra's ability to continue as a going concern.

However, the company remains confident that the various initiatives taken up by it would ensure cash flows to service its debt, realise its assets and discharge its liabilities.

Reliance Infra’s wholly owned subsidiary, KM Toll Road Pvt. Ltd. terminated its agreement with National Highways Authority of India on May 7, 2019, and accordingly, the business operations have ceased to continue. However, the company has not provided for impairment in the values of assets.

At the end of the financial year 2018, KM Toll Road has total assets worth Rs 1,627 crore.

According to Reliance Infra, due to this cancellation, NHAI is liable to pay Rs 1,205 crore as the termination has arisen owing to NHAI’s event of default. It is confident of recovering its entire investments in the company and hence did not provide.