The US sanctions on Iran and fluctuation of various currencies against the dollar has had a cascade effect on an Indian exporter of stainless steel products.
Varun Industries Ltd (VIL), a Mumbai-based listed company, has been referred to the corporate debt restructuring cell by Indian Bank to turn around its fortunes.
Eleven banks, including Indian Bank, United Bank of India, Central Bank of India, and Bank of Baroda, collectively have a loan exposure of Rs 1632 crore (term loan, Rs 69 crore; and working capital loan, Rs 1,563 crore) to the company.
The CDR Cell was jointly floated by banks and financial institutions in 2001 to restructure debts of viable corporate entities affected by internal and external factors.
VIL, which has diversified into mines and minerals, wind energy, and oil and natural gas sectors, posted a loss of Rs 158 crore in FY12 on a turnover of Rs 3,177 crore (against net profit of Rs 39 crore in FY11 on a turnover of Rs 2,941 crore).
Reasons behind fall
Following the US and other Western countries imposing sanctions on trade with Iran in the September-October 2011 period, VIL's distributors in Dubai were unable to sell goods to Iranian buyers. Recovery of existing receivables suffered even as the Iranian Dinar depreciated sharply against the dollar.
Slowdown in exports to key markets in the MENA (Middle East and North Africa) region due to political turmoil added to VIL's woes.
Further, with the currencies of key MENA countries depreciating against the dollar, VIL's Dubai distributors who traded with buyers from these countries got impacted. Since VIL's overseas customers suffered losses, it had a cascading impact. Recovery of receivables slowed down considerably.
Bankers pointed out that while credit limit is fixed in rupees, the drawdown is in dollars. So, any appreciation in the dollar can affect exporters' liquidity position, shrinking their credit limit to the extent of the appreciation. As a result, VIL had to pay various banks to stay within the sanctioned credit limit.
Proposed CDR package
To help VIL tide over the deficit in cash flows, allow it to execute orders at hand and also make commitments to take up fresh orders, banks have proposed conversion of working capital irregularity amounting to Rs 296 crore into working capital term loan (WCTL).
Bills discounting working capital irregularity of Rs 680 crore will be converted into another WCTL. Banks will also sanction need based working capital limits aggregating Rs 713 crore.
The loan restructuring will take effect only if VIL's promoters infuse Rs 30 crore by way of preference shares or unsecured loans.
Bankers feel that once the CDR package is implemented it would address long-term profitability and production shortage issues.
An email sent to the company seeking comments on the CDR went unanswered.
Shares of VIL closed 4.94 per cent up at Rs 24.45 per share on the BSE as against the previous close of Rs 23.30.