Omkar Chemicals Demerger: What went wrong?

Demergers, which are expected to unlock shareholder value, have not worked in favour of shareholders of Omkar Speciality Chemicals and Lasa Supergenerics.

Omkar Speciality Chemicals Limited (Omkar Chemical) incorporated in 2005, is in the business of speciality chemicals & active pharmaceutical ingredient (API). The business was carried out by Omkar Chemical on its own and through its 4 subsidiary companies. API business was carried out in the company’s subsidiary Lasa Laboratory Pvt Ltd (Lasa Lab).

In 2015, director of Omkar Chemical has approved the scheme of arrangement under which all subsidiary companies will be merged into Omkar Chemical and demerger of its API business to “Lasa Super generic Ltd” (a company incorporated by Omkar chemical for the purpose of demerger of API division) with the appointed date being 01/04/2015. The scheme was approved by NCLT in April 2017.

Post demerger, Omkar chemical and Lasa Supergenre business collapsed and both the company facing liquidity challenges as well as potential Insolvency process threat. In this article, we analyzed the company’s financials from Mar-12 onward to understand what went wrong which lead to the current situation.

Transaction in 2015

Financial Analysis: Omkar Chemical

Table 1: Total Borrowings & Interest Cost (All Figs in INR Crores)

Particular	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar- 17(3)	Mar-18	Mar-19
Banks	77.72	149.44	204.53	214.74	221.42	129.69	170.74	169.66
FI's	21.33	0.69	1.75	9.22	6.54	28.52	2.97	2.95
Sub-Total (A)	99.05	150.12	206.28	223.95	227.96	158.21	173.71	172.61
Loan from Related Parties / Directors (B)	0.20	0.71	0.19	0.00	0.09	60.14	59.00	56.89
Total (A -B)	99.25	150.84	206.47	223.95	228.05	218.35	232.72	229.50
Interest Exp(5) (incl. capitalised portion)	7.56	10.78	15.86	21.15	27.38	22.73	24.07	14.53
Other borrowing cost	0.46	0.07	0.72	1.59	1.52	0.81	2.06	0.09
Foreign currency Adj.	0.42	0.00	0.53	-0.08			0.00	0.00
Total Interest cost	8.45	10.85	17.11	22.66	28.90	23.54	26.13	25.71
Average Borrowings*	99.05	124.58	178.20	215.12	225.95	193.08	165.96	173.16
Avg. Int Rate	8.53%	8.71%	9.60%	10.53%	12.79%	12.19%	15.74%	14.85%

*excluding related party loan & closing balance for Mar-12 is considered as average borrowings for Mar-12

1. Borrowings and interest rates to services the loan have kept on increasing continuously from Rs. 99 crs (8.53%) in March-2012 to Rs 229.5 crs (14.85%) in March-2019.
2. In earlier years company was having ECB’s loan and later switched to domestic borrowing at a higher rate due to increase in foreign exchange.
3. There was a merger of subsidiary companies with Omkar and demerger of API division which was approved by the NCLT in April-17 and impact in financial was given in Mar-17, hence bank loan reduced from 221.42 crs to Rs. 129.69 crs in Mar-17, on account of transfer to API division.
4. Amount of loan reflecting in the Lasa Supergenres Ltd (API Division) as on Mar-17 is Rs. 119.75 crs
5. Loan from directors / related party does not carry any interest (as per Annual Report)

As on Mar-19, Omkar chemical has classified as NPA by all three banks, and total default (principal & interest) is Rs. 199 crs (approx.) as mentioned in the auditor’s report.

Table 2: Assets & WIP Summary (All Figs in INR Crores)

Particulars	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17*	Mar-18**	Mar-19
Tangible Assets	36.57	87.53	86.52	144.75	154.46	168.35	75.98	68.17
Total Intangible Assets	3.01	4.90	4.61	4.41	6.37	0.12	0.16	0.12
Capital Work in Progress	59.52	44.32	96.44	121.57	148.72	-	-	-
Total Assets	99.09	136.76	187.57	270.72	309.55	168.47	76.14	68.29
Operational Revenue	166.95	211.69	240.28	265.13	413.41	345.02	197.64	42.65
Tangible & Intangible Assets (excluding CWIP)	39.40	92.36	90.99	149.15	160.66	168.47	76.14	68.29
Asset Turnover Ratio	4.24	2.29	2.64	1.78	2.57	2.05	2.60	0.62

*It is a consolidated figure of omkar chemical excluding API division as per IGAAP
**Omkar chemical figures are considering the impact of Ind-AS

• Ind-AS adjustment effect: In Mar-18, there is an Ind-AS adjustment of Rs. 85 crores.
• Capacity Utilisation: Company keeps on spending for expansion of its fixed assets, whereas its utilised capacity was around 70% -80% (API division was having around 90%), Omkar chemical’s utilised capacity reduced to 60% and then to 21%. in last two years.
• Write off / Impairment Loss: In Mar-17 company has written off capital work in progress (CWIP) to the tune of Rs. 176 crs (though in Mar-17 balance sheet CWIP deletion was Rs. 201 crs which included transfer to API division on demerger) & in Mar-18 there was an addition of Rs. 55 crs in CWIP and subsequently booked as an impairment loss in the same year itself.
• Transfer on account of Demerger: Mar-17 financial include impact of merger/demerger, in fixed assets schedule it was shown that Rs. 29 crs is transferred to Lasa Supergenre Ltd on account of merger/demerger, whereas as per the Lasa Supergenre balance sheet (Mar-17) book value of fixed asset transferred is Rs. 131 crs (including CWIP of Rs. 22.8 crs).      

Merger/demerger impact and revaluation of Fixed Assets

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