‘MTM, derivative losses to be blamed’

‘MTM, derivative losses to be blamed’
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First Published: Mon, Apr 06 2009. 09 07 PM IST

Inside story: Wockhardt Ltd chairman Habil Khorakiwala. Harikrishna Katragadda / Mint
Inside story: Wockhardt Ltd chairman Habil Khorakiwala. Harikrishna Katragadda / Mint
Updated: Tue, Apr 07 2009. 01 13 PM IST
Mumbai: Habil Khorakiwala, chairman of Wockhardt Ltd, has written to senior employees saying that the drug maker plans to divest stakes in units that are not central to its main business to overcome a cash crunch caused by mark-to-market and derivative losses as well as tighter bank credit.
The 1 April letter was written the day after Khorakiwala relinquished the post of managing director while remaining chairman of Wockhardt, the country’s sixth largest drug maker by sales, which referred itself to the corporate debt restructuring cell of ICICI Bank Ltd, its main bank. His son Murtaza Khorakiwala replaced him as managing director.
Inside story: Wockhardt Ltd chairman Habil Khorakiwala. Harikrishna Katragadda / Mint
“Wockhardt is...looking at a divestment plan with a strategic partner for some of its non-core businesses and activities,” Khorakiwala said in the letter reviewed by Mint. “In other words, we are insulating ourselves like (in) a typical insurance plan keeping in mind current market conditions.”
Mint has previously reported that Wockhardt, under financial pressure and with a mounting debt burden, plans to sell some of its assets and also restructure businesses including foreign subsidiaries to meet its immediate liabilities.
The company has Rs3,400 crore of liabilities, including foreign currency convertible bonds worth $140 million (Rs700 crore) that are to be redeemed by September.
“... You must be wondering why should there be a liquidity crunch when our performance and sales have shown such tremendous growth,” the senior Khorakiwala wrote in the letter. “The reason is the loss we have suffered due to various factors like mark-to-market and derivative losses, banks tightening their line of credit policies, the impact of the global slowdown and the ongoing war of depreciating currencies.”
Mark-to-market, or MTM, is an accounting practice of valuing an asset or liability in line with its current market price and not the cost at which it was acquired.
Wockhardt has previously denied any derivative losses for the company. A Wockhardt press release on 21 March 2008, said it will “neither incur any losses arising out of the derivatives-hit scenario in the current quarter, nor will there be a situation of such losses to occur subsequently”.
The press release was issued a day after Mint reported, citing several bankers and risk management experts, that the firm had taken a significant hit from exposure to complex cross-currency options and structured products.
“Wockhardt has a highly professional and expert team” that has been undertaking normal business related to hedging for the past few years, the company statement had said. “In addition, our record of the last few years clearly demonstrates that there have been no losses whatsoever because of business related hedging activities,” it added.
Wockhardt last week postponed an announcement of its fourth quarter results for a second time after its auditors SR Batliboi and Co. could not complete the annual audit of accounts in the absence of adequate information on foreign exchange losses and other key data.
In the January-March quarter of 2008, Wockhardt posted a 23% fall in net profit on one-time derivatives-related losses. The company follows a January-December fiscal year. In that quarter, Wockhardt also took a one-time mark-to-market charge of Rs27.9 crore.
“The losses were due to Wockhardt’s long-term hedging instruments that were bought to reduce the interest costs for the company’s loans,” a company statement, released along with the first quarter results, said. It did not specify how much its loans were, but said it was hedging the interest for 50% of its long-term loans.
Subsequently, the company has shown such losses under extraordinary items in its books during the second as well as third quarters.
Khorakiwala’s letter said the company will benefit from restructuring of its debt as “it allows us non-payment towards our loans for some time, thereby giving us a huge flexibility in generating our own liquidity”.
There is no set pattern for debt restructuring. Banks do pare interest rates, offer a moratorium on repayment to companies and allow them longer time to repay loans. But all these “benefits” do not come free as banks ask for greater control in running the companies in trouble.
While Khorakiwala’s letter confirmed the company’s plan to divest so-called non-core businesses, it cautioned Wockhardt employees against market speculation and media reports that could be “mere doctored rumours and incorrect information”.
As of 31 December 2008, the promoters held 73.64% of Wockhardt. They have pledged a 43.11% stake as well as the company headquarters in Mumbai’s Bandra-Kurla Complex, a suburban business district, with lenders to borrow funds for expansion in their privately held hospitals company, Wockhardt Hospitals Ltd, as well as overseas acquisitions.
Wockhardt shares rose 1.51% or Rs1.15 to close of Rs77.4 a piece on the Bombay Stock Exchange on Monday even as the key Sensex index climbed 1.8%.
ch.unni@livemint.com
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First Published: Mon, Apr 06 2009. 09 07 PM IST