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infrastructure | IST

Auditors' concerns are related to road, metro biz; Reliance Infra confident of fulfilling debt obligations, says CEO Punit Garg

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Auditors BSR & Co. LLP and Pathak H D & Associates raised questions about Reliance Infra's ability to continue as a going concern and have issued a disclaimer of opinion

A loss of whopping Rs 3,300 crore, disclaimer of opinion from the auditors and impairment taken for assets of Reliance Naval and Engineering and Reliance Power—that was what Reliance Infrastructure of the Anil Ambani group had to report in its fourth-quarter earnings. After deferring its results twice, Reliance Infra reported a staggering Rs 3,301 crore consolidated loss in the March quarter mainly due to Rs 8,481 crore exceptional expenses on account of impairment of its investment in subsidiaries. The loss would have been even higher, had the company not transferred Rs 6,612 crore from the general reserve.
More importantly, auditors BSR & Co. LLP and Pathak H D & Associates raised questions about Reliance Infra's ability to continue as a going concern and have issued a disclaimer of opinion. (A disclaimer of opinion is a statement made by an auditor that no opinion is being given regarding the financial statements of a client.) The auditors note that they were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the consolidated annual financial results.
The auditors have also raised red flags on the advances given to the related party worth Rs 7,092 crore and question the recoverability of the same.
Another observation made by the auditors is with respect to Rs 1,775 crore worth of corporate guarantees made by Reliance Infra during the year for its group companies. This is interesting as this guarantee is more than the market capitalisation of the company. Reliance Infra has lost 85 percent of its market cap over the last 12 months. From Rs 480 in September 2018, the stock is now trading below Rs 60.
The management, however, has dismissed auditors concerns and said that nothing has changed from Q3 and that they are confident that there would be no further need for impairments.
They are also confident of meeting all the debt obligation as they expect Rs 5,000-7,500 crore being realised on account of outstanding claims over the next two quarters. CNBC-TV18's Anisha Jain has interviewed Punit Garg, executive director and CEO of Reliance Infrastructure. Here are the edited excerpts:
Auditors have issued a disclaimer of opinion and raised going concern on the company, basically saying they can't vouch for the numbers and that the equity isn't enough to meet the liabilities. What does make you confident that you can keep on as a going concern?
You need to understand the basic issue here that, in consolidated accounts of Reliance Infra, the observations included the company's subsidiaries like metro or roads. So obviously, in the metro unit, which is under the debt resolution now, or in the roads, because the project execution was delayed due to land execution, the debt repayments and the interest cycle became due.
We have already announced our exit from the road portfolio. It requires to be refinanced. The road subsidiary has 11 units, and probably, five or six of thors units had such kind of observations from the auditor. I'm not overly concerned about that because we would exit the business by the end of FY20.
I also see this as a result of an overhang from the post IL&FS saga. These are the same auditors who have signed 2-3 accounts. And there is no significant or adverse change from Q3 to Q4.
So I think the auditors are trying to protect themselves and write the observations more as activism.
I believe that we are in good shape. Now there is new RBI guidance on stressed assets, and our metro and others would be resolved with that. So I think we are good to go.
You might not be overly concerned but you will appreciate investor concerns as auditors are the watchdogs of the companies and they audit based on the regulations set by MCA and ICAI and not just to protect themselves. Why could you not provide sufficient evidence to the auditors that they had to issue disclaimer opinion? And should the investors assume the worst that these numbers can’t be trusted?
I think that we have answered the question of auditors very well in our notes in the para(graph) 8, where we have very clearly defined that EPC advances are something which is business as usual. And, you know, delays in acquiring the land to complete these projects is something which is not in control of the company. And it there is a delay where the advances have been given to the sub-contractor for the work. I think what we have done, like to do receivable provisioning, we have provided the provisioning of Rs 2,000 crore over there as good accounting practise. And I think as a company, we are conservative in our accounting practices, and we have done that, but I can't control the auditor's view on such things. As I told you earlier, nothing has changed between Q3 & Q4.
When are you expecting these claims? And you talked about monetising road assets. What is the value? What else are you looking to monetise?
As we have announced earlier, we would be exiting our road portfolio, where we are talking about all these issues. And in the road portfolio, we have already announced our Delhi-Agra road monetisation at Rs 3,600 crore where the net equity value is Rs 1,700 crore.
Have you realised Rs 3,600 crore in cash? When is this expected to flow in? Have all the conditions of the agreement met?
We would be receiving the money in next 50 days as we complete some of the CPs to the agreements, which is usual and we are in advance stage of negotiations for finalizing the other assets as well and hopefully, we will speak to you again in next 30-60 days with some happy news.
What debt obligation becomes due over next 6-12 months and how do you plan to meet those? There have been defaults and delays in the past and the rating agencies had also taken an adverse view. How confident are you of servicing all obligations?
We have to understand differently. If we look at March 2018, we were in a standalone infra at the debt and liabilities of Rs 19,000 crore. From there, we have come down to less than Rs 6,000 crore as of March 2019. Our cost of interest, I would say, which used to be Rs 15,000 crore then, is less than Rs 600 crore this fiscal.
And in addition, we are looking at monetisation, as I told you, of our road assets. We are looking at our regulatory assets, which are under approval of almost Rs 22,000 crore, and arbitration proceeds which are Rs 8,000 crore. Even 25 percent of this realised in this year, which I believe is realisable, I don't have to worry about anything. I won't have any debt in that case by the end of this fiscal year. But rather, I would be sitting on a cash pile. So I don't see there are any challenges before us in meeting our obligations in the current fiscal year because I'm looking at a dip in debt of Reliance Infrastructure as told by my chairman a few weeks ago.
Moving on, you have written off entire investment in Reliance Naval but what about Reliance Power? Auditor raised going concern on that. You have given around 12,000 crores worth advances to related parties. What is the recoverability of that and what makes you believe there is no need to provide for impairment of these investments and advances?
First, as far as Reliance Naval is concerned, when we acquired this company in 2016, its accounts were NPAs then and continued to be  NPAs untill now. We got an opportunity this year to write off our entire investment in Reliance Naval and Rs 4,500 crore has been written off in our books.
I would also like to say, in Reliance Power also, we have impaired our investment by Rs 2,000 crore. Some on accounts of shares which were given as security for certain loans and also impairments of the investments which are before Reliance Power. The prudent policy is that, not only receivable to be done but also advances. So we have provision Rs 2,000  crore over there but that does not mean we have written off that because we believe these will be recovered in the near future.
Given that the power and gas sector is not going to see an overnight overhaul, do you think there might be more pain before it gets better? Any more impairment possible for Reliance Power?
Let me put it this way that, you know, when you talk about specifically Samalkot. We are setting up a plant in Bangladesh and some of the units are going over there. So we know that those are the signed deals, so it is going to be realised from there, and hence, there isn't any impairment or losses provided there. So I think we are pretty good where we are today and we do not foresee anything more happening in our accounts in the near future.
At your board meet, you announced that you are planning to raise debt by privately placing debentures. But you will need to get the instrument rated. Which rating agency are you going to get it rated from? Recently, one has withdrawn rating, the other says you are not co-operating? Has there been an improvement from such time?
I would like to make it very clear that Reliance Infra has no plans to raise any more debt on its books. As I said, we are looking forward to paying off all the debt in our books through the monetisation and prove the regulatory assets which are unapproved as the money comes in. I think these are business as usual, some of the stuff that you take approval from your board, and these are the provisions made into the accounts for that purpose. But we have absolutely no plan to increase any debt. 
In terms of your business and topline, how would that grow? What confidence can you lend to the investors? What would be the revenue driver post all this monetisation?
The question you are asking falls into the same category. You know the government's announcement of Rs 4 lakh crore. I think there is substance to that, there is no competition in that. Its enough for all the companies, and if the orderbook is growing on that, and you know the project's implementation is happening, obviously the realisation is happening.
My metro projects are doing well, its an EBITDA-positive business. My BSES, you know, utility project is doing well. It has only a debt of Rs 1,500 crore and it is generating a much higher EBITDA. Even in the last year, it generated an EBITDA of Rs 3,500 crore. So it is self-sufficient to meet, and you know, in the future it would do better because the demand is growing and the power requirements are growing.
In EPC business, I think we are the second largest in the country as far as the orderbook of Rs 28,000 crore is concerned. I think it would grow further and it would give a significant size to the balance sheet and the profitability as well.
Our defence business in future will grow. There is, other than road business, nothing on the anvil, I would say, to monetise further. And I think my RAU and arbitration claims of Rs 30,000 crore. Even if I look at 25 percent of coming to me, its Rs 7,500 crore. I do not need anything else because I will be sitting on a cash pile.
So, clearly, a lot in your business depends on these outstanding claims. When will you recover the receivables? What's the visibility, for say, the coming two quarters?
In some of the cases, judgments are reserved or final hearing is going to happen for Delhi metro in the Supreme Court in July. I do expect In Q2 & Q3, some of the judgments would come and that's why  I'm expecting in this fiscal year at least there would be the realisation of anywhere between Rs 5,000-Rs 7,500 crore and similar amount will be following in next 2 years and that is how the realization of the entire amount would happen.