I have been going through the past annual reports of Garware Hi Tech from the year 2000. Sharing the notes and highlights. I have tried to cover the key matters and events in their own chronological order.
Garware’s difficult past-
The polyester film industry was going through a recessionary period at the turn of this century. Garware Polyester suffered huge losses in FY1999, FY2000, and FY01. This led to a significant net worth erosion and the company was declared Sick. Source- FY2000 Annual report.
This continued in FY01 and the company considered financial restructuring with the bankers. While IDBI agreed, ICICI, UTI, and EXIM Bank filed complaints in the Debt Recovery Tribunal.
From FY02 Annual Report-
The company undertook financial restructuring; revalued its Land and Buildings and took write-offs in investments in and loan to a 82% subsidiary, Garware Chemicals Ltd (more on this later). The net losses on revaluation and adjustments were passed through the share premium account.
This is finally how the restructuring happened with the bankers. Looks like ICICI and EXIM continued with their loan. One Time Settlement was made with IDBI & UTI. From AR08-
Garware Chemicals Ltd
Garware Polyester had a 82% subsidiary, Garware Chemicals Ltd. They had set up a Di-Methyl Terephthalate (DMT) plant in 1999 which started commercial production in May’2000. DMT was a key RM back then for the company.
Total CWIP as of April’2000 was around 250cr, this is what the break-up looked like. The company had huge pre-operative expense and most of it was from Interest expense-
Apart from the downturn Garware was facing in their core business due to the industry conditions, Garware Chemicals had its own issues. The company had done a huge capex in GCL for backward integration and wasn’t able to meet its debt repayments
GCL was referred to BIFR. From AR02-
In FY02, Garware Polyester took a write-off in the investment made in GCL and Loans given to GCL. This was a part of the financial restructuring plan (mentioned above) where the company revalued its Land and Buildings, and took write-offs in the Investment and Loan provided to GCL. Source- FY02 Annual Report
GCL became an associate company after the write-off and it looks like GCL continued its manufacturing. Garware Polyester continued to source DMT from GCL.
Garware Polyester continued to extend the corporate guarantee to GCL. Source FY02 Annual Report
In FY04, IDBI offered a restructuring plan for GCL and Garware brought back some amount on its balance sheet in the form of Loan and Advances. About 90cr was in total provided to GCL in the form of equity and loan by Garware Polyester. Only 36cr was brought back. GCL continued to remain an associate-
In FY05, Garware Polyester exercised its right and converted the loan amount into equity shares. Source- FY05 Annual Report
In FY06, Garware Polyester reached an agreement with Mizuho Corporate Bank (formerly Fuji Bank).
Nothing much happened in GCL for the next three years. Suddenly in FY11, Garware Polyester made an arrangement to purchase GCL’s assets by doing VERY weird adjustments. Garware Polyester first purchased around 15.5cr of shares of GCL from various stakeholders. This was added to their own equity investment and then the entire amount was disposed of. Source Annual report FY11-
The assets of GCL exceeded liabilities by 7.4cr. Given Garware Polyesters’s 51cr investment (after buying stake from others), the company created a 44cr Goodwill and converted the equity investment into Goodwill.
That year, they also purchased some “Capital Asset” from a Director for 15.3cr. This probably belonged to GCL as well.
Something interesting happened in FY08, DMT became obsolete that year and wasn’t used anymore by the polyester film manufacturers globally.
The management confirmed this in the Q1FY22 concall and were well aware of this, yet they went ahead and acquired the assets of GCL. They tried making use of the plants for other purposes but that never fructified and they had to dispose of the assets over the years.
It did not end there, the company went ahead and took a huge impairment of their assets a year later in FY13 and wrote-off the entire Goodwill amount. And because they did not want to book a notational loss, they went ahead and revalued their land again.
I think this is a serious red flag. The company knew back in 2008 that DMT was phased out from manufacturing polyester film and yet they did this scheme of arrangement.
Disc: Invested at lower levels.