Hayleys MGT suffers first loss over fraud

Monday, 16 May 2011 02:37 -     - {{hitsCtrl.values.hits}}

  • Over Rs. 700 m full year provisioning leads to Rs. 800 m loss
  • Criminal investigation begunfollowing forensic audit
  • Discrepancies in receivables and inventories force company to make an additional $ 3.2 m provisioning in 4Q after a similar move in 3Q

In what is dubbed as the biggest fraud in a listed manufacturing entity, Hayleys MGT Knitting Mills Plc has suffered its first ever loss in 2010/11 financial year following an estimated over Rs. 700 million provisioning.

As per provisional results released last week, Hayleys MGT Knitting Mills reported a Rs. 800 million loss in comparison to a re-stated profit figure of Rs. 367 million in 2009/10. In US Dollar terms the profit after tax in 2009/10 was $ 3.21 million whilst it has been now-re-stated as $ 3.16 million.

It was the first loss for the company since the knitted fabric manufacturer listed itself in 2003. In 2007/8 financial year Hayleys MGT posted its highest ever profit of $ 5.8 million.

The loss in 2010/11 is owing to an estimated $ 6.52 million (over Rs. 717 million) provisioning in the 3Q and 4Q accounts for fraud involving inventories and trade receivables. Such provisioning wasn't separately indicated in the interim accounts but reflects in the $ 6.4 million increase in the administrative expenses which rose to $ 11.13 million in 2010/11 from $ 4.7 million in 2009/10.

In the first half of 2010/11 accounts administrative expenses amounted to $ 4.4 million. Hayleys MGT’s distribution expenses too had increased by 188% to $ 2.4 million which in the first half amounted to only 0.3 million.

Despite the loss, the company’s revenue had risen by 17% to $ 58.3 million as against a drop in 2009/10 to $ 50 million from $ 59 million in 2008/9. In rupee terms revenues had risen by 14% to Rs. 6.5 billion in 2010/11.

Hayleys MGT in 2010/11 interim accounts said a special audit verification carried out by B. R. De Silva , Chartered Accountants, and, SJMS Chartered Accountants, on Trade Receivables and inventories respectively revealed the following.

 There were discrepancies between the value of physical balance of inventories and that in the financial records.

Net realisable values of certain categories of inventories were lower than that of the stated weighted average cost.

Trade receivables were overstated as some credit notes due had not been recorded.

These required an additional provision of USD 1,187,889 for trade receivables and USD 2,090,463 for inventories and provided for in the Financial Statements for the period ended 31st December 2010.

It also said continuation of verification into receivables and inventories has warranted a further provisioning of USD 1,779,539 and USD 1,446,255 respectively and were effected in the Q4 financial statements.

 The company also disclosed that a forensic audit was completed, and the findings warranted a criminal investigation which is being carried out.

The last disclosure on the fraud issued on 8 December only stated that forensic audit has commenced. Criminal investigation being carried out is a new disclosure.

The former Deputy Managing Director D.B. Weerasinghe who is alleged to have carried out the fraud resigned from the Company in November last year. He joined Hayleys Group as Maintenance Engineer in 1988 and joined Hayleys MGT in 1993. He was appointed to the Board in July 2003 and to Hayleys Group Management Committee in January 2007. A Structural Engineer, he holds a BSc. and a MBA from the University of Colombo and Post Graduate Diploma in Industrial Engineering from the National Institute of Business Management (NIBM).

In the 2010/11 interim accounts provision for bad and doubtful debts had risen to $ 1.35 million from a negative $ 0.3 million. In the first half of 2010/11 it was only $ 0.8 million. Provision for unrealised profit and write down of inventories amounted to $ 3.6 million, up from $ 0.1 million in 2009/10 financial year. In the first half of 2010/11 it was only $ 0.6 million.

The Company’s revenue reserves had plunged to Rs. 238 million in 2010/11 from Rs. 1.1 billion a year earlier and Rs. 557 million in the third quarter of 2010/11 and Rs. 1.1 billion in the first half.

Despite Rs. 800 million loss being reported, Hayleys MGT shares last week closed up Rs. 2.40 to Rs. 38 whilst it hit an intra-week high of Rs. 40.90. It finished the financial year 2010/11 at Rs. 35.60 and the current price reflects an increase of Rs.2.40 as well. Its highest in the quarter ended 31 March, 2011 was Rs. 42 whilst its 52-week highest is Rs. 57 whilst the lowest has been Rs. 28.60.

Hayleys MGT Knitting Mills PLC., commenced operations in 1992 with an initial investment of US$ 4 million. Today, it has grown into a large organisation with the total investment in the region of US$ 200 million and the production capacity of 1,000,000 Kg of knitted fabric per month.

The Board of Directors of Hayleys MGT Knitting Mills comprises Mohan Pandithage (Chairman) Sarath Ganegoda (Deputy Chairman), S. Spezza (Managing Director), Mahesh Amalean (Chairman MAS Holdings which owns 6%), R. Seevaratnam (Independent Director) and Dhammika Perera.  H.R.Peries who was representing Equity Investments Lanka Limited owning 5.3% stake resigned from the Company on April 29.