Zuari Agro Chemicals Ltd. - Quarterly/Annual Result Disclosures and Notes dated 31 Dec 2021
Auditor and Management Disclosures and Notes for the quarterly results dated 31 Dec 2021
Notes:
1. The above unaudited standalone financial results and consolidated 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:
1 Zuari Agro Chemicals Limited (ZACL)
Subsidiaries
2 Mangalore Chemicals and Fertilizers Limited (MCFL)
3 Adventz Trading DMCC (ATD)
4 Zuari FarmHub Limited (ZFL)
Joint Venture
5 Zuari Maroc Phosphates Private Limited (ZMPPL)
Paradeep Phosphates Limited (PPL) (subsidiary of ZMPPL)
Zuari Yoma Agri Solutions Limited (ZYASL) (associate of PPL)
3. These unaudited standalone and unaudited consolidated financial results for the quarter ended on December 31, 2021 and year to date from April 1, 2021 to December 31, 2021 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 February 02, 2022. 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. The Company is engaged in the manufacturing, distribution, import and sale of Urea, DAP and various grades of NPK fertilizers under the “Jai kisaan” brand for more than 5 decades. In Q4 of FY19 and Q1 of FY20, due to significant delays in receipt of Government 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 and also a buildup of high priced inventory. The Company was unable to pass on the increase in the prices of the raw materials to the farmers which contributed to operating losses, cash flow mismatch and reduced financial flexibility leading to the Company having a net current liability position of INR 1,982.19 crores as at December 31, 2021 (INR 1,556.74 crores as at March 31, 2021) before considering the effect of the business transfer agreement as explained in Note 5(i). These factors adversely impacted the Company’s cash flows, debt position, and led to the recall of borrowings by certain lenders, downgrading of rating to ICRA D and prolonged shutdown of its plants for different periods during the earlier periods.
With optimal working capital liquidation/ realization and in agreement with lenders on the resolution plan, the Company had cleared all the over dues with Banks / Financial Institutions and have reduced its borrowings and all debt accounts are standard with the lenders. All these helped the Company in upgrading its credit ratings to ICRA B stable in April 2020 which though shifted to Credit rating ICRA B placed under watch with developing implications from July 2020 onwards.
During the current quarter, Ammonia and Urea plant operated at normal levels. Further, operations of NPK A and B plant were intermittently not in operation primarily due to non-availability of raw materials.
The above factors/events indicate that there is a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern. As described in Note 5(i), the Company has entered into a Business Transfer Agreement with a group company (PPL) for transfer of its fertilizer plant at Goa and associated businesses (Fertilizer Division) of the Company as a going concern on a slump sale basis and against which an advance equivalent to 30% of the consideration has been approved by the Board of PPL to be paid to the Company after adjusting amount receivable from the Company. During the current quarter, PPL continues to provide necessary financial assistance to run the operations of the Company. Further, the Company is also undertaking various steps to continue operations at its fertilizer plant and discussions with lenders for funding as required based on available credit limits. A combination thereof and resultant future cash flow projections, the management of Company believes that the Company will be able to realize its assets and discharge its liabilities and material uncertainty on the Company’s ability to continue as a going concern will be addressed.
5. (i) Pursuant to Board approval dated February 22, 2021, the Company entered into a Business Transfer Agreement (BTA) dated March 1, 2021 with Paradeep Phosphates Ltd (PPL), subsidiary of ZMPPL, a joint venture company (the Company and OCP S.A. hold 50% each of the total equity capital of ZMPPL and ZMPPL holds 80.45% of the share capital of PPL) to transfer its fertilizer plant at Goa and associated businesses as a going concern on a slump sale basis for an agreed enterprise value of INR 2,052.25 crores (equivalent to USD 280 million as per the BTA).
Pursuant to the BTA, i) the longstop date has been extended from June 30, 2021 to December 31, 2021 and further extended to June 30, 2022; and ii) with the commitment from PPL for necessary financial assistance, the Company is provided with the option to settle all outstanding amounts against fund based working capital facility prior to or on the completion date instead of earlier option of prior to completion date.
The effect of the transfer will be reflected in the financial information/statements of the period in which the deal is consummated.
As required by Ind-AS 105 “Asset Held for Sale and Discontinued Operations” the disclosure of the impact of the above mentioned BTA as discontinued operations after eliminating intercompany transactions is as follows:
Total Income 521.11 710.05 555.20 1,807.20 1,397.37 2,194.97
Total expense 547.33 687.19 597.03 1,803.38 1,554.86 2,369.28
Profit/(loss) for discontinued operations before tax the year (26.22) 22.86 (41.83) 3.82 (157.49) (174.31)
Tax charge including deferred tax pertaining to discontinued operations - - - - - -
Profit/(loss) for discontinued operations (26.22) 22.86 (41.83) 3.82 (157.49) (174.31)
During the previous quarter, PPL has filed the Draft Red Herring Prospectus (DRHP) with one of the object clause to part financing the acquisition of the Company’s fertilizer plant at Goa and associated businesses. In response to DRHP filed by PPL, SEBI has issued its final observations and thus PPL is expected to close the IPO process by March 31, 2022.
(ii) During the year ended March 31,2020, pursuant to board approval obtained on February 5, 2020 and vide Business Transfer Agreement dated March 31, 2020, the Company had transferred its assets and liabilities of its retail, speciality nutrient business (SPN) & allied, crop protection and care business (CPC), seeds and blended businesses (farmhub business) to Zuari Farmhub Limited (ZFL), a wholly owned subsidiary, with effect from March 31, 2020 on a going concern basis under a slump sale arrangement.
As per the Business Transfer Agreement dated March 31, 2020 with ZFL, pending certain regulatory licenses, the Company had agreed to provide support services to ZFL at Nil consideration for an intermediate period, initially agreed for three months, which was extended till March 31, 2021. April 1, 2021 onwards, Company has not provided any support services to ZFL.
As per the above-mentioned Business Transfer Agreement and addendum thereof with ZFL, the consideration for slump sale of the farmhub business to ZFL was settled by issuance of Compulsory Convertible Debentures (CCDs) of ZFL for INR 435.56 crores during the financial year 2019-20 and balance of INR 350.00 crores in the current financial year.
The Company has entered into a non-binding agreement with a potential investor who has expressed its interest to invest in equity of ZFL to the tune of USD 46.5 million (being 30% of the enterprise value of ZFL) in two tranches and for which a confirmatory due diligence is at an advanced stage and a definitive agreement is expected to be executed in the coming quarters.
6. The Company had received a requisition under section 100(2) of the Companies Act, 2013 from a group of shareholders holding 10.69% of shares, requesting the Board to call for an Extraordinary General Meeting (EGM) to discuss matters including proceeding against the two BTAs as mentioned in Note 5 (i) and (ii) above. The EGM was called on June 23, 2021 by the Board of Directors through video conferencing/ other audio visual means. However, since the requisite quorum was not present at the EGM, thereby the EGM of the Members of the Company called by the requisitionists under section 100, was cancelled for want of quorum as stipulated under section 103(2) (b) of the Companies Act 2013. Necessary filing in this regard have already been made by the Company as required by the Regulations / statute. Further, subsequent to the year end March 31, 2021, the same group of shareholders have filed a petition in National Company Law Tribunal (NCLT), Mumbai for cancellation of these BTAs for which the Company based on the legal opinion obtained believes that the petition, would not be tenable and does not have any impact on the BTAs. The petition is pending before NCLT, Mumbai.
7. The Company and the Group has assessed the impact of COVID - 19 and concluded that there is no material impact on the operations of the Company and the Group and no material adjustment is required at this stage in the financial results for the quarter ended December 31, 2021. However, the Company and the Group will continue to monitor the impact which is a continuing process, given the uncertainties with its nature and duration of COVID - 19 and the impact may be different from the estimates considered while preparing these results.
8. 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 (DOF), the Government has ex-post facto approved the subsidy paid on specific quantity of P&K fertilizer received in the relevant 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 (DHC) 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 a writ petition to the higher authority against the order passed by DoF. On March 3, 2021 DHC has issued notice in the writ petition and has directed DoF to file its reply. DoF has filed its reply on July 27, 2021 and the Company has been directed to file its rejoinder within six weeks thereafter. The Company has filled rejoinder and matter is now listed on March 28, 2022. Based on the legal assessment done by the Company, it is hopeful to realize the aforesaid amount, and hence, no provision has been made in the accounts.
9. Vide notification number 26/ 2018 dated 13 June 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 01 July 2017 to include ITC availed only on inputs which excludes input services. The management has contested this amendment by filing a writ petition in the Hon'ble High Court of Bombay at Goa. Based on a tax opinion, irrespective of outcome of writ petition, input tax credit on services would be available for utilization in foreseeable future. The management is confident of utilization of balance input tax credit, as at December 31, 2021 the Company has carried forward an amount of INR 98.16 crores (March 31,2021 INR 97.98 crores) as amount GST Input credit utilizable towards this matter.
10. In case of subsidiary (MCFL), during the year ended March 31, 2021 had recognised urea subsidy income of INR 29.14 crores without benchmarking its cost of production using naphtha with that of gas-based urea manufacturing units recently converted to natural gas, as notified by the Department of Fertilizers [DoF] for subsidy income computation, against which MCFL had filed a writ petition against the DoF before the Hon’ble High Court of Delhi [DHC]. Pending finalization of writ petition before the DHC against this matter, the management of MCFL based on legal opinion and considering the fact that the energy cost is always a pass through in subsidy computation, believes that artificial benchmarking is arbitrary and discriminatory and is confident of realisation of the aforesaid subsidy income.
11. Consequent to reassessment of uncertainty over eventual realization arising due to the order of DoF against the Subsidiary (MCFL) (challenged by a writ petition which is pending before DHC), during the year ended March 31, 2021, MCFL derecognized subsidy income of INR 26.86 crores relating to higher energy norms which was recognized till December 31, 2020 of fiscal year ended March 31, 2021.
12. The Group including Company is engaged in the business of manufacturing, trading and marketing of chemical fertilizers and fertilizers products which constitutes a single operating segment as per Ind AS 108 hence separate segment disclosures have not been furnished.
13. During the quarter ended December 31, 2021, NPK A plant was shut down for 83 days and NPK B plant was shut down for 86 days due to non-availability of raw material. Subsequent to the quarter, NPK B Plant has resumed its operation on January 07, 2022 and NPK A Plant continues to be under shut down due to non-availability of raw material.
14. During the year ended March 31, 2020 due to devolvement of loans, a remuneration of INR 0.81 crores paid to its then managing director in accordance with ordinary resolution but not without prior approval from banks/financial institutions and approval of the shareholders by a special resolution as per provisions of Section 197 of Companies Act, 2013 (Act) read with Schedule V, has been recognized as recoverable from the 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 the then managing director, after obtaining prior approvals from the banks / financial institutions for which Company has initiated the process.
15. During the quarter ended December 31, 2021, the Company has received INR 13.71 crores towards full and final settlement as per agreement dated June 17, 2019 between the Company and McDowell Holdings Limited (MHL), which has been recognized as other income.
16. The Code of Social Security 2020 (‘Code’) relating to employee benefits received Presidential assent in September 2020. However, effective date and final rules/interpretation have not yet been notified/issued. The Company and the Group is in process of assessing the effect of the Code and will recognize the impact, if any, based on its effective date.
17. In respect of a subsidiary company located outside India (ATD), whose financial information/ 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 information/ 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.