MC EXCLUSIVE Kaynes Tech to change auditor as it admits to reporting lapse, clarifies goodwill and receivables

Kaynes Technology share price

Facing one of its sharpest market corrections since listing, Kaynes Technology moved quickly on Monday to address a series of governance and accounting concerns raised in recent brokerage notes (most prominently Kotak Institutional Equities’ report) that triggered a near-50 percent plunge in the stock over the past week.

The company admitted that a related-party transaction with its smart-metering subsidiary Iskraemeco had not been disclosed in its standalone FY24 financials, though it was correctly reported in the consolidated results. “They accepted it as a mistake. The auditor also missed it. They said they will rectify the disclosure and are likely to change the auditor,” said a source privy to the latest investor meeting held by the management.

Elara Securities’ post-call note added that Kaynes intends to strengthen internal reporting by introducing software that ensures automatic contra-entry checks and may 'contemplate replacing current auditors with more reputed firms'.

On a business update call with analysts this morning, the management acknowledged 'reporting lapses' in standalone financial statements, offered detailed reconciliations of goodwill and intangible assets arising from its recent acquisitions, and signalled its intent to replace its statutory auditor. Analysts described the tone of the call as 'submissive'.

Goodwill, intangible accounting explained with numerical breakdown

A major trigger of the selloff was Kotak’s assertion that Kaynes’ acquisition accounting was opaque, especially the treatment of goodwill and intangible assets in Iskraemeco and Sensonic. Here's the granular data:

Iskraemeco acquisition

Net assets: Rs 199 million

Consideration paid: ~ Rs 430 million

Intangibles recognised: Rs 1,150 million

Net capital reserve: Rs 521.5 million

Sensonic acquisition

Net assets: – Rs 58 million

Consideration: ~ Rs 453 million

Goodwill recognised: Rs 511 million

Rather than presenting these separately, Kaynes netted off the capital reserve of Iskraemeco and the goodwill of Sensonic, disclosing a consolidated Rs 10.3 million goodwill/capital reserve. The management said the presentation adhered to Ind AS 103, the business combination standard.

The Rs 1,150 million intangible asset includes customer contracts and technical know-how related to smart metering, a key point the Kotak report had questioned.

Praveen Sahay, analyst at PL Capital, flagged the market’s discomfort with the treatment: “Typically, such contract-linked value is recognised as goodwill. Kaynes has classified a large part of it as intangible assets. Their explanation is not entirely convincing.”

He added that while most other concerns were addressed well, the treatment of goodwill versus intangibles could remain a lingering issue. “This will still be a sticking point for some investors because it is technical, and they will want auditor-level confirmation.”

Iskraemeco margins, revenues corrected; receivable math clarified

Kaynes also countered Kotak’s claim of unusually high margins at the acquired smart-metering business.

H2 FY25 Iskraemeco margins were 9 percent, not 28 percent as cited in the note.

The lower margins reflected inventory write-offs of Rs 440 million, diligence-related provisions, and low H1 sales.

H2 FY25 revenue: Rs 5.3 billion consolidated

H1 FY25 revenue: Rs 850 million

H1 FY26 revenue booked: ~Rs 5 billion; H2 FY26 expected: Rs 3 billion

Crucially, the company clarified that Rs 6.87 billion of receivables relate to smart meters and include non-current receivables, of which Rs 2.4 billion will be discounted in the near term through foreign-bank supply chain financing at lower interest rates.

Sahay said the receivable spike is explainable but will take time to unwind: “Receivables are elevated because of the nature of smart-meter contracts and the acquisition. They have given a clear breakup and the numbers are logical.”

“But the business growth we saw this year from smart meters will not continue. The receivable burden should fall accordingly.”

Working capital is structurally high in EMS businesses, management argued, but said receivable days will be managed down to 90.

Growth pivot away from smart meters; EMS, auto, railways to lead

Both the management and brokerages said the company is structurally de-emphasising the volatile smart-metering contracts of Iskraemeco.

The order book for FY26–27 is now dominated by automotive electronics, EV components, railways, aerospace & defence.

JP Morgan noted in its CFO meeting summary that non-smart-meter businesses will outgrow the company’s average growth rate, while Iskraemeco stabilises.

Capex, OSAT and PCB projects on track; no FCF soon but OCF positive

Kaynes reiterated its investment plan for OSAT and PCB facilities, funded via internal accruals, QIP proceeds, debt, and government subsidies. It expects no impediments in receiving capital subsidies and plans total capex of roughly Rs 8,500 crore over the next several years (as per earlier disclosures).

JP Morgan and JM Financial both flagged that the company is unlikely to be free-cash-flow positive in the near term, given heavy capex, though operating cash flow is expected to turn positive and be ploughed back into asset creation.

The company disclosed Rs 9.5 billion in asset purchases, including Rs 7.8 billion of PPE and capital work in progress and Rs 1.7 billion of right-of-use assets.

What still remains unresolved

Despite extensive clarifications, analysts say two issues will continue to weigh on sentiment:

• Accounting treatment of goodwill vs intangible assets, still not fully aligned with common practice.
• Governance perception, auditor oversight, RPT omission, and the need for stronger internal controls.