Recovering money from Gitanjali Gems won’t be easy


Gitanjali Gems Ltd’s shares are down by 45.2% since end-January, with their fall accelerating last week after its name cropped up in the Punjab National Bank (PNB) fraud transactions case. The weekend brought confirmation with a first information report filed by the Central Bureau of Investigation, alleging fraudulent transactions done by Gitanjali and two subsidiaries through PNB worth Rs4,887crore. This amount is the worth of the letters of undertaking (LoU) and letters of credit (LC) that PNB officials are said to have fraudulently issued to Gitanjali.

These developments may not come as a big shock to its investors, who didn’t think highly of its shares anyway. Its market capitalization was Rs445 crore as of last Friday, against its revenue for FY17 of Rs16,573 crore and net profit of Rs167 crore. After adjusting for other comprehensive income, it turned in a loss of Rs22.5 crore. Even if you ignore the recent fall, its market cap shows lack of investor confidence or interest.

If indeed it has entered into fraudulent transactions of this magnitude, why should anybody trust the reported financial statements? That is a valid question, but this publicly available information can give some idea about the firm’s position, with the caveat to take it in with lots of salt.

Its fiscal 2017 annual report has signs of the company undergoing financial pressure. The auditors had drawn attention to overdue loans/debentures and overdrawn working capital limits. The auditors have said they have relied on other auditors for financials of subsidiaries with a total revenue of Rs978 crore. And, in the case of subsidiaries with revenue of Rs1,976 crore, they have relied on the management’s statement itself. Such reliance is not unusual but, given what is emerging now, the procedure looks risky.

How does its balance sheet look? Gitanjali’s is a working capital-intensive operation, and its receivables were Rs12,828 crore, while its revenue was Rs16,573 crore. That translates to around 10 months of debtor days; that is, the company takes that long to get paid for sales. But it does not get that leeway from creditors and in fiscal 2017, its net working capital to sales was 70%. That is the proportion of its revenue stuck in the working capital cycle.

No wonder then, its cash from operations fell to Rs743 crore in FY17, from Rs1,338 crore a year ago. That also means that if the firm is called upon to repay the Rs4,887 crore that has been borrowed through PNB’s LoUs/LCs, it will be hard-pressed to raise the cash. A large part of its bank balance is marked as margin deposit against guarantee. Among its contingent liabilities, two major items are disputed income tax of Rs537 crore and sales tax notice of Rs94.6 crore.

In some cases, its receivables position has been outstanding for longer than allowed by RBI. It said it could not create Rs1.48 crore worth of liquid assets for debenture redemption, despite being such a small sum, due to liquidity constraints on account of regulatory restrictions on gold imports and unfavourable dollar-rupee fluctuations since 2012-13.

While talking about delays in servicing working capital loans in FY17, the annual report mentions that since May/June 2013, changes in the RBI policy on issuing BG/LC for gold purchases has affected cash flows and continues to do so in FY17. Related party transactions are present, but in relation to its revenues, don’t amount to a very material number.

That then is the financial position of Gitanjali Gems. It does not look very healthy, and recovering their money is not going to be an easy task for the banks.livemint