Mumbai: SR Batliboi and Co., part of the network of audit and consulting firm Ernst and Young, and the former auditor of Wockhardt Ltd, has declared in its report published in Wockhardt’s annual report for the fiscal ended December 2008 that the firm’s liabilities due in 2009 add up to Rs1,441.40 crore. The amount is higher than the expected cash flows and any committed or contracted source of funds of the company, Batliboi said. It added that Wockhardt’s ability to continue to function depends on the successful outcome of its March application for a corporate debt restructuring (CDR) scheme.
After the completion of the 2008 audit in April, Wockhardt, India’s sixth largest drugmaker by sales, appointed BDO Haribhakti to replace SR Batliboi and Co.
A spokesperson for Wockhardt said the auditor was changed in keeping with stock market regulator Sebi’s guidelines on transparency. A spokesperson for Ernst and Young said that generally, auditors do not comment anything beyond what they have written in their report.
The liabilities mentioned in the auditor’s report include an October redemption of the company’s foreign currency bonds that were issued in 2004, and a number of secured and unsecured loans from various banks in local and foreign currency.
The auditors said that Wockhardt’s ability to repay these liabilities due by 31 December this year is dependant on the successfull implementation of the CDR and other initiatives proposed by the management.
A corporate advisor working with a Mumbai-based law firm said the auditors’ report essentially means that the company’s current financial position is precarious because lenders could be forced to take recovery action if the debt restricting plans are not successful as expected. This person asked that neither he nor his firm be identified because Wockhardt had been a client in the past.
Wockhardt’s management had earlier this year said it would divest certain non-core assets to raise additional funds. In March, it also announced that the company was working on a corporate debt restructuring package through ICICI Bank Ltd. In this CDR application, Wockhardt had sought additional time to meet liabilities such as term loans raised in Indian currency, bonds worth $108 million, and foreign currency loans worth $250 million.
The CDR cell of ICICI Bank has not yet announced specific plans for Wockhardt. A person familiar with the situation but who did not wish to be identified said that the negotiation with some of the company’s lenders is still not complete.
A spokesperson for Wockhardt Ltd said the company has had a “very good engagement” with the banker and that it is currently in the last stage of finalizing the CDR “Hopefully it will be finalised in the next few weeks. The CDR arrangement is expected to resolve most of the current financial issues.”
While the CDR scheme is aimed at deferring loan repayments, the auditors’ report added that the company has not determined the quantum of the mark to market losses on certain derivative contracts on which the company stopped payment of margins called in by the banks during the year. The banks subsequently claimed an amount of Rs489 crore on account of this action and the company plans to contend these claims. “Pending the settlement for the matter, we are unable to quantify the extent of provision that may be required to be made in this regard,” the audit report said. Due to currency fluctuation and increased interest and finance costs, the company had posted a net loss of Rs138 crore in 2008 on sales of Rs3592.5 crore. The trend continued in 2009 and the company registered a net loss of Rs20.2 crore in the first quarter ended March 31.
Wockhardt has already divested its German business under its subsidiary Esparma GmbH, as well as its animal health business for a undisclosed amount. Though the company has unofficially claimed that it has received about Rs290 crore through these deals, a sector analyst said the actual realisation from these two deals were far below the company’s expectation. “Hence the company will have to raise at least Rs1,200 crore in addition to meet the liabilities due in 2009,” this analyst said.
Wockhardt chairman Habil Khorakiwala had last week said at the company’s annual general meeting that it will continue looking for opportunities to sell more businesses or assets that do not have a serious impact on the company’s profitability. Mint had reported in June that Pfizer Inc. the world’s largest drug maker by sales, was set to acquire some of Wockhardt’s units.