Karuturi Global promoters increase pledge as problems continue

The promoters of Karuturi Global have been forced to increase their pledge towards the lenders by as much as 58% even as the company is trying to stabilise their operations in Ethiopia. The promoters hold 15.52% of which 8.59% has been pledged, up from 5.42% by end of March 31, 2013. 

Over the past week, New-Delhi based NBFC - DMI Finance which is among the lenders to Karuturi disclosed that they hold 7.95% in the company after converting a part a pledged shares into equity.

The company, which is among the top exporters of roses and has embarked on agriculture in Ethiopia, has said that it net profit dropped by close to 77% to Rs 3.6 crore for the first quarter of Fy14 as compared to the corresponding previous period. The management of Karuturi has said that the drop in net profit is on account of exchange loss on restatement of FCCB liability.

“There is an equivalent exchange gain on restatement of advances to subsidiaries credited to Foreign Currency Monetary Translation Reserve (FCMTR) account under reserves and surplus. Accordingly there is no impact on the cash flows of the company and over a period of time, profit and loss impact also will be set off through the credit line in FCMTR account,” the company observed.

Revenues increased by 10% to Rs 135 crore. As a result of a incurring an one time expenditure of close to Rs 18 crore during the quarter and sharp increase in interest outflow, the operating profit plummeted by close to 77% to Rs 3.6 crore.

The promoters led SaiRamakrishna Karuturi during early this year managed to strike a deal with the consortium of foreign currency convertible bond (FCCB) holders led by Goldman Sachs for restructuring the instruments.

The holders had agreed to restructure FCCBs worth $39 million, through a written resolution involving extension of maturity of existing FCCBs, part redemption of FCCBs and part refinance by cashless exchange of these FCCBs for new ones, subject to the Reserve Bank of India's approval.

In late 2007, Karuturi Global had issued $50 million of FCCBs. This was aimed at raising funds for acquisitions in Kenya. These bonds were due in October 2012. The company had approached the bondholders with a restructuring proposal, hoping its fledgling agriculture business would start generating cash. However, with quarterly revenues of only about $5 million, the company couldn't meet the deadline.

Analysts and investors, in addition to the weakness in the operations and debt, are concerned about the drastic drop in promoter shareholding in the company as lenders are aggressively invoking pledges. The company, which has under lease expansive tracts spanning about 3,00,000 hectares, has been at the centre of a controversy over alleged land grabbing as well.

In the recent past, credit-rating agency Icra had flagged concerns, stating there were risks associated with the foray into agriculture. The risks included execution and logistical ones, which could be compounded by adverse climatic changes, resulting in lower-than-expected yields of agricultural and floricultural products.

In late 2011, Karuturi had taken a $15-million hit due to floods in the region, even as it embarked on an ambitious $300-million agriculture foray.

Against the planned capital expenditure of $209 million (Rs 1,150 crore) for cereal production across 80,000 hectares (according to Icra estimates), the company has already incurred capital expenditure of about Rs 1,000 crore.

"So far, the company has bought equipment worth about $50 million and built 120 km of drainage, 120 km of dykes and about 50 km of canals. However, adequate returns on the significant capital investments by the company aren't expected in the near to medium term. This of due to the company's moderated development/cultivation plan after the losses incurred due to flash floods in the second half of FY12," Icra noted.

It added there were concerns over materialisation of significant contingent liabilities against income tax and transfer pricing disputes.