Ramkrishna Forgings Appoints External Agencies To Probe Inventory Discrepancy

Ramkrishna Forgings Ltd. has appointed two external agencies to investigate a discrepancy found in its inventory records, the company’s management said in a conference call with analysts on Monday. The company has asked the agencies to submit a fact-finding report before it announces its quarterly earnings, though a date for the earnings announcement is yet to be set.

The management said the internal audit committee had appointed the external agencies, but declined to name them.

The company’s internal audit found that the book value of some inventory was significantly higher than the value of physical stock. In an exchange filing on Saturday, the company said it may take a hit of 4–5% of its net worth because of the lapses. A rough calculation shows the company had a net worth of over ₹29 billion as of 30 September, suggesting a potential hit of ₹1.2 billion to ₹1.5 billion.

“Our assessment right now is that it is a notional loss because it is an irregularity in recording of inventory,” said Lalit Khetan, chief financial officer, on the call. “But certainly, we have to wait for any conclusion... we have to wait for the report of the independent agency to come to any final conclusion.”

The discrepancies were mainly found in work-in-process inventory, the management said. It assured that the discrepancies were not due to any theft, and that despite the hit to net worth, the company has sufficient raw material and stock to continue running its operations. The management stressed this was the first time in the company’s history that such a discrepancy had occurred, and reaffirmed its commitment to strong corporate governance practices.

As part of its operations, the company keeps an inventory equivalent to 100–120 days of production, the management said. It explained that high inventory levels are needed due to commitments to clients overseas and the just-in-time inventory model they follow.

Several analysts raised questions about the company’s earlier comment that promoters may infuse funds to cover the impact of the inventory recording lapse. One analyst asked during the call: “In case the promoter decides to infuse funds, how will that benefit minority shareholders?... because they (stake) will get further diluted.”

The management said, without offering detailed clarification, that any fund infusion would be structured in a way that does not “adversely impact” minority shareholders. “... that instrument will be designed in a manner so that there will be no financial loss to the minority shareholders due to this impact,” it said.