After an initial sharp reaction to the huge losses it reported, United Spirits has recovered some ground. After postponing its earnings announcement three times since May 15, 2014, United Spirits finally managed to arrive at the provisioning figures which resulted in a net loss of Rs 5,380.10 crore on a standalone basis for the quarter ended March 2014.
One reason for the stock’s quick recovery was that the markets had already been expecting large losses after the company’s June 3 warning that it would take a hit of Rs 3,690.3 crore to its net worth. This was because the proceeds from the sale of its Whyte and Mackay whisky business would not be enough to repay the loan taken to buy it in the first place.
But more than the numbers and financial performance of the company, the appended management and auditors’ notes make for interesting reading, explaining why the company had to postpone its reporting on three occasions.
Also Read
The notes also highlight the way United Spirits, the cash cow of the UB group, was milked to prop up other group companies. It also lays bare the poor standard of corporate governance in some Indian companies. After Ranbaxy, United Spirits is the second Indian company in recent times to be sold to foreign players on valuations which did not match the firm’s inherent fundamentals.
But let’s look at what Diageo has discovered – its financial scrutiny is ongoing – before announcing its audited numbers. The story behind the provisioning in United Spirits reveals the mess in company. Following are the provisioning made by the company and the reason for doing so:
- The biggest provisioning has been in the case of sale of Whyte and Mackay which was acquired in 2007 for $1.2 billion using high leverage. This business has been sold by Diageo at a loss of GBP 429.15 million. The sale proceeds were clearly not enough to pay back the loan with which it had been acquired, so a provision of Rs 3,690.3 crore had to be created to reflect the loss. The only consolation is that it is the cleanest of all the provisions.
- The notes in the company’s results reads: “Certain parties who had previously given undisputed balance confirmations for the year ended 31 March, 2013 claimed in their balance confirmations to the Company for the year ended 31 March 2014 that they advanced certain amounts to certain alleged UB group entities, and that the dues owed by such parties to the company will, to the extent of the amounts owing by such alleged UB group entities to such parties in respect of such advances, to be paid/refunded by such parties to the company only upon receipt of their dues from such alleged UB group entities.” These dues to the Company (USL) are on account of advances made by it in earlier years under agreements for enhancing capacity, obtaining exclusivity and lease deposits in relation to Tie-up Manufacturing Units (TMUs); agreements for specific projects; or dues owing to the Company from customers. These dues were duly confirmed by the parties as payable to the company in earlier years but these parties are now disputing the amounts. The board has authorized a detailed inquiry in the matter and has made a provision for Rs 649.55 crore against it.
- USL has also provided for Rs 330.32 crore against a loan of Rs 1,422.31 crore from its wholly-owned subsidiary United Breweries (Holdings) Ltd (UBHL). It has been found that an amount of Rs 1337.40 crore has been recorded in a board resolution on 11 October 2012 as dues (together with interest) as an unsecured loan by way of an agreement entered into between the company and UBHL. It has also been found that the loan is for a tenure of eight years with a moratorium of six years and carries an interest rate of 9.5% to be paid from the 18th month onwards.
- On May 5, 2014, less than two weeks before the company was supposed to announce its results, it received a letter from an entity (alleged claimant) saying that it had given loans amounting to Rs 200 crore to Kingfisher Airlines at an interest rate of 15% on the basis of agreements executed in December 2011 and January 2012. Under the several obligations under the purported agreements, certain investments held by the company were subject to a lien, and requires USL, pending the repayment of the said loan, to pledge such investments in favour of the alleged claimant to secure the loans in question. On further inquiry, it was found that the board of directors of the company had not approved or ratified any such agreement. Based on legal opinion, the company has not provided for any liability or obligation in this case. The case, however, raises the fear the hidden skeletons in the cupboard that could come tumbling out later.
According to Varun Lohchab of CIMB, of the three provisions that have been mentioned by the company, only the one classified as loan to UBHL can increase going forward. The balance sheet of United Spirits has gone through a severe cleaning but at a huge cost to its net worth. According to the auditors’ note, the company has lost 52% of its four-year peak net worth and will therefore be required to file a report under the Section 23 of the Sick Industrial Companies (Special Provisions) Act, 1985. The board beliefs that this is only a technical requirement and that the long term prospects of the business remains unaffected as the losses are on account of exceptional items.