Zuari Agro Chemicals Ltd. - Quarterly/Annual Result Disclosures and Notes dated 30 Jun 2020
Auditor and Management Disclosures and Notes for the quarterly results dated 30 Jun 2020
Notes:
1. The above unaudited standalone (standalone financial results) and consolidated (consolidated financial results) financial results have been prepared in accordance with the Indian Accounting Standards (“Ind AS”) prescribed under section 133 of the Companies Act 2013 read with the Companies (Indian Accounting Standards) Rules 2015, as amended, from time to time.
2. The consolidated financial results comprise the financial results of the Company and its subsidiaries, herein after referred to as "the Group" including its Joint Venture (including Joint Venture’s Subsidiary and Associate) as mentioned below:
Subsidiaries:
a) Mangalore Chemicals and Fertilizers Limited (MCFL)
b) Adventz Trading DMCC (ATD)
c) Zuari Farmhub Limited (ZFL)
Joint Venture:
a) Zuari Maroc Phosphates Private Limited (ZMPPL)
b) Paradeep Phosphates Limited (PPL) (subsidiary of ZMPPL)
c) Zuari Yoma Agri Solutions Limited (associate of PPL)
Also refer note 9 below.
3. These unaudited standalone and unaudited consolidated financial results for the quarter ended June 30, 2020 have been reviewed by the Audit Committee and taken on record by the Board of Directors of the Company in their respective meetings held on September 3, 2020. The Statutory Auditors have conducted “Limited Review” of these results in terms of Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended and have expressed unmodified report on the above results.
4. Vide notification number 26/ 2018 dated June 13, 2018, the Government has amended the definition of “Net Input Tax Credit (ITC)” for the purpose of GST refund on account of inverted duty structure with effect from July 01, 2017 to include ITC availed only on inputs which excludes input services. The management has contested this amendment (both retrospective and prospective) at different levels of authorities including but not limited to filing a writ petition in the Hon’ble High Court of Bombay at Goa in this regard. Basis legal view obtained by the management and also relying on orders of the High Court of Gujarat in respect of another application of other companies on this matter, believes that the refund / utilization in respect of tax paid on input services would be available and that no liability including interest, if any, would arise from the same on the Group. Consequently, as at June 30, 2020, the Company and the Group has carried forward an amount of INR 96.26 crores and INR 125.06 crores, respectively as amount recoverable towards this matter.
5. The Company is in the business of manufacturing and trading of various types of fertilizer products. In earlier periods, due to significant delays in receipt of subsidies, drought like situation in key marketing areas led to deterioration of the Company’s liquidity position along-with elongation of the working capital cycle of the Company. Also, the Company was unable to pass on the increase in the prices of the raw materials to the farmers which contributed to the cash flow mismatch and reduced financial flexibility of the Company. These factors adversely impacted company’s cash flow, debt positions, delay in repayment of loans on contractual maturity date, recall of loans from two lenders due to non-meeting of covenant breach, downgrading of their rating to (ICRA) D and prolonged shut down of its plants for different periods during the previous year.
With optimal working capital liquidation/ realization and in agreement with lenders on the Resolution plan, the Company has cleared all the overdues with Banks / Financial Institutions and have reduced its borrowings and all accounts are standard with all lenders. All these helped upgrading of its credit ratings to (ICRA) B stable in April 2020
During the current quarter, in this unprecedented COVID pandemic situation, the urea plant has been continued in-spite of non-availability of bagging laborers. However, NPK A plant was intermittently closed and has commenced operations from August 17, 2020 and NPK B plant is under total shutdown. This is temporary impact due to COVID outbreak.
The management believes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business and thus material uncertainty will be resolved due to various steps undertaken, restructuring and sale of certain assets as explained in note 12 and 13, ongoing discussion with other lenders for funding as required, expected advance from a Group Company against acquisition of assets, and future cash flow projections, the management of Company believes that the Company is fully secured in relation to the payment of external debts payable by the Company.
6. During the quarter ended June 30, 2020 amid COVID pandemic, NPK A plant was shut down for 47 days. Subsequent to the quarter, NPK A plant was shut down for 43 days till date and NPK B was shutdown from April 1, 2020 till date.
7. The unaudited financial results of the Company and Group for the quarter ended June 30, 2020 have been prepared on the basis of consistently applied policy parameters of estimating price for period for which pricing/escalation/or de-escalation is pending to be finalized by the Government in accordance with notified pricing policy as applicable to respective entity of the Group.
8. During the previous year, assessment had been performed regarding recognition criteria in relation to deferred tax asset and tax balances on the basis of future profitability projections and manner/period of utilization thereof including restructuring exercises being considered by the management along with considering paying Income Tax at reduced rates as per the provisions/conditions defined in the new Section 115BAA in the Income Tax Act, 1961, inserted vide the Taxation Laws (Amendment) Ordinance 2019.
9. In June 2018, Zuari initiated arbitration proceedings against Mitsubishi Corporation, Japan (Mitsubishi) and MCA Phosphates Pte Ltd (MCAP) for resolution of disputes under the Shareholders’ Agreement dated December 20, 2011. In the previous period, basis the Arbitral Tribunal award & ICC Court of Arbitration (ICC) final order passed on May 7, 2020 and stipulation agreement signed between the Company and Mitsubishi on March 27, 2020, the Company has assessed the fair value of its investment in rock mining project and accordingly, recognized an impairment loss of INR 117.79 crores in the financial for the quarter and year ended March 31, 2019 and were appropriately restated and disclosed under exceptional items as per Ind AS 8 “Accounting Policies, Change in Accounting Estimates and Errors”. Further, the Company also concluded that the Company would cease to consolidate MCAP as Joint Venture in accordance with Ind AS 28 “Investments in Associates and Joint Ventures” using equity method of consolidation. Hence, the Company recognized impact in the consolidated financial results for the quarter and year ended March 31, 2020 and also carried investment at fair value of USD 0.01 as at March 31, 2020.
As per ICC final order, during the quarter, the Company has transferred to Mitsubishi 21,690,000 shares of MCAP valued at USD 0.01 per share. Also, since the Company and Mitsubishi owed each other USD 216,900, the amounts were set off and no money was exchanged between the Company and Mitsubishi as per the Arbitral award.
10. The Company is carrying a receivable of INR 19.49 crores for the period February 2013 and March 2013 on account of accrual of subsidy income at higher rate in comparison to rate at which subsidy is granted. However, as per the office memorandum dated April 16, 2018 issued by the Department of Fertilizer, the Government has ex-post facto approved the subsidy paid on specific quantity of P&K fertilizer received in the district during February 2013 and March 2013 months in different year since 2012-13 at the rates fixed for the next financial year which were lower than the rate approved by cabinet /CCEA for that year. The Company has represented to the Department of Fertilizer that the material moved in February 2013 and March 2013 was part of the approved movement plan of January 2013 and hence Nutrient Based Subsidy rates of 2013 should be applicable. The Company had filed writ petition at Hon’ble High Court of Delhi against Department of Fertilizer to recover this amount. Pursuant to the court order the Court hearing was granted by DoF to present its claims and also submitted written representations. DoF vide their order dated September 29, 2019 had rejected the representation and submissions by the Company. The Company has filed writ petition to the higher authority against the order passed by DoF and based on the legal assessment done by the Company, it is hopeful to realize the aforesaid amount, hence, no provision has been made in the accounts.
11. In this unprecedented COVID-19 pandemic situation, with the support and relaxations extended by the Central and respective State Governments, the Company’s operations at factory premises were temporarily impacted as Ammonia and Urea plants operated at lower capacity and NPK A plant was intermittently shutdown. This is on account of disruption in bagging and dispatch operations due to non-availability of labours owing to significant rise in COVID-19 cases within and around factory premises. In the month of July 2020, the Company had taken necessary step in consultation with State health department to step up isolation centre to treat COVID-19 cases thereby ensuring health and safety of contractual workmen. The above has resulted into lower contribution margins.
Currently, the Company has engaged additional labourers from outside the state to ensure continuous normal operations of Ammonia and Urea plant. The Company recommenced NPK A plant on August 17, 2020 to manufacture complex fertilizers.
Further, the Company has assessed the impact of this pandemic on recoverability of carrying value of financial and non-financial assets using various internal and external information up to the date of approval of these unaudited financial results and concluded that there is no material adjustments required at this stage in the unaudited financial results of the Company for the quarter ended June 30, 2020. However, the impact assessment of COVID-19 is a continuing process given the uncertainties associated with its nature and duration. The impact of COVID-19 may be different from that estimated as at the date of approval of these unaudited financial results and the Company will continue to monitor the impact of the same.
12. Pursuant to board approval obtained on February 05, 2020 and vide business transfer agreement dated March 31, 2020, the Company transferred its assets and liabilities of its retail, speciality nutrient business (SPN) & allied, crop protection & care business (CPC), seeds and blended businesses to Zuari Farmhub Limited (ZFL) with effect from March 31, 2020, on a going concern basis under a slump sale arrangement. Consequent to which a gain of INR 698.97 crores as an exceptional income was recognized in the standalone financial results of the quarter and year ended March 31, 2020.
In terms of Ind-AS 105 “Asset Held for Sale and Discontinued Operations” particulars of discontinued operations considered in the above results are as follows: -
(Loss)/ Profit for discontinued operations before tax the year (17.50) 6.33 (3.36)
Tax charge/ (credit) including deferred tax pertaining to discontinued operations 4.32 - 0.83
(Loss)/ Profit for discontinued operations (13.18) 6.33 (2.53)
As informed earlier the Company is in the process of raising equity resources to the tune of USD 46.5 million (being 30% of enterprise value of ZFL) for which confirmatory due diligence is under progress.
As per Business Transfer Agreement, pending certain regulatory licenses, the Company had agreed to provide support services to ZFL at Nil consideration for the intermediate period (initially agreed for three months which has been now extended to 7 months).
13. Board of Directors in their meeting held on June 19, 2020 had given in-principle approval for Sale of its Fertilizer plant at Goa to Paradeep Phosphates Ltd, at a preliminary valuation of USD 280 million. This transaction would bring in long term funds in the Company and would take care of long-term Liabilities of the Company.
Both the parties have agreed on preliminary valuations subject to adjustments following due diligence outcome which is in progress. Definitive agreements will be signed confirmatory due diligence and statutory approvals including but not limited to approval of shareholders of the Company, Government of India and others.
It may be noted that presently, the Company and OCP hold 50% each of the total equity capital of Zuari Maroc Phosphates Private Limited (ZMPPL) and ZMPPL holds 80.45 % of the Share capital of PPL
Pending statutory approvals as defined above, the Company has not considered any impact of proposed sale of its Fertilizer plant at Goa in the unaudited financial results.
14. The Company is engaged in the business of manufacturing, trading and marketing of seeds, pesticides, chemical fertilizers and fertilizers products which constitutes a single operating segment as per Ind AS 108 hence separate segment disclosures have not been furnished.
15. The figures of quarter ended March 31, 2020 are the balancing figures between the audited figures of full financial year and the published year to date figure up to the third quarter of that respective financial years which were subject to limited review.
16. Due to loan repayment defaults during the previous year, the remuneration of Rs. 81 lacs paid to its Managing Director in accordance with ordinary resolution but not without prior approval from banks/ financial institutions and approval of shareholders by special resolution as per provisions of Section 197 of Companies Act, 2013 (Act) read with Schedule V, has been recognized as recoverable from Managing Director as at year end. As per Section 197(10) of the Act, the Company proposes to seek approval of shareholders by way of special resolution for waiver of recovery of remuneration paid to Managing Director, after obtaining prior approval from the banks / financial institutions. During the current quarter the Company has initiated process for obtaining approvals from the banks / financial institutions.
17. In respect of one subsidiary located outside India, whose financial statements and other financial information have been prepared in accordance with accounting principles generally accepted in the respective country. The Company’s management has converted the financial statements of such subsidiary located outside India from accounting principles generally accepted in the respective country to accounting principles generally accepted in India.
18. Previous period’s figures have been re-grouped/re-classified wherever necessary, to correspond with those of current period’s classification.