Auditor notes halve Punj Lloyd networth

The auditors of Punj Lloyd Ltd, the engineering & construction major, have red-marked the company’s accounts with so many qualifications, it tantamount to a stunning halving of the company’s networth.

Venkatesh Subramaniam, Deepal Delivala, Atul Tiwari and Rishi V Iyer, analysts with Citigroup, after working through the company’s numbers up to the quarter ended June 30, said in the note that Punj Lloyd’s networth would be 50% of the Rs3,133 crore estimated by the company because of auditor qualifications worth over Rs1,580 crore (at the end of April-June).

Shorn of the qualifications, the quartet said, Punj Lloyd’s book value per share — which is net worth divided by the number of shares — is only Rs47, exactly half of a reported Rs94.

The beleaguered company has not had a great time ever since it acquired Singapore-based Sembawang Engineers & Constructors and the UK-based Simon Carves in 2006.

It has been plagued by litigation over cost overruns and delays in some legacy orders of these companies.

“If one knocks off the auditor qualifications from the net worth, one realises the extent to which the balance sheet is stretched with net debt to equity of 2.1 times at the end of last fiscal,” the Subramaniam, Delivala, Tiwari and Iyer wrote.

This is second time auditors have red-flagged a listed company in recent days. Earlier this month, B K Ramadhyani & Co, the auditor of Kingfisher Airlines, expressed grave concerns about the airline’s financials.

In its report, which is a part of Kingfisher’s annual report for 2010-11, the auditor said accumulated losses at the end of last fiscal “were more than 50% of net worth. The company has incurred cash losses during the financial year and in the immediately preceding financial year.”

To some analysts like Neeraj Monga of Veritas Investment Research Corp of Toronto, Canada, that meant Kingfisher is bankrupt.

An auditor qualifies something when he feels that the company in question has not complied with the accounting standards set down by the Institute of Chartered Accountants of India (ICAI).
Net worth is the excess of assets over liabilities.

Questions sent by DNA to Punj Lloyd remained unanswered at the time of going to the press, and the company’s auditor, S R Batliboi & Co, could not be reached for comment.

In one of its observations included in the investor communiqué that Punj Lloyd sent to the Bombay Stock Exchange last month, Batliboi said the company had last year taken credit for a claim of Rs243 crore on a contract and had also not accounted for liquidated damages amounting to Rs65 crore deducted by the customer.

“Further, there are other debtors outstanding of Rs83 crore and unbilled work in progress of `166 crore relating to the said contract as at June 30, 2011. Due to the uncertainty over ultimate collection of the said amounts, we are unable to comment on the same,” it said.

Punj Lloyd responded by saying that it had initiated proceedings against the customer last year. “The management, based on expert inputs, is confident of recovery of amounts exceeding the recognised claim and waiver of liquidated damages and is also confident of recovery of other debtors and unbilled work in progress,” it added.    

Some of these qualifications, which pertain to issues similar to the one mentioned above, were made last year.

Punj Lloyd’s consolidated revenues rose 30% in Q1 from a year ago to Rs2,263 crore but posted a net loss of Rs12.66 crore compared with Rs30.41 crore in Q1 of last fiscal.

So how serious are the auditor qualifications?

Quite, said an analyst with a domestic brokerage. “With some companies, even a single qualification would cause a furore. But all these qualifications (for Punj Lloyd) are accounted for given that the company has been facing problems for 2-3 years now,” he noted, requesting anonymity.

Chartered accountant Hinesh Doshi said qualifications are certainly not in the interest of shareholders. One of his peers, wishing not to be named, said it also depends on the seriousness of the issue. “Qualifications don’t mean the company necessarily has to effect the changes suggested,” he added.

Are instances like this proof enough of the fact that auditors are becoming more vigilant and prudent?

“I would say it’s because accounting and auditing standards are becoming clearer and more stringent,” said Abdul Majeed, partner, PricewaterhouseCoopers. The analyst with the domestic brokerage, however, observed that the increasing scrutiny by the ICAI, analysts and even the media, could also be a reason.