The company will intimate the Board for Industrial & Financial Reconstruction (BIFR) after it places a report prepared by the board of directors giving reasons for the erosion in net worth before the shareholders, since it is a "potentially sick company" under Section 23 of Sick Industrial Companies (Special Provisions) Act of 1985.

In the report, Godrej Foods chairman Adi B Godrej has identified three major reasons for the erosion of net worth: forex fluctuation; excessively aggressive production and distribution of the tetrapack fruit drink Jumpin; and heavy expenditure on a distribution network to market Godrej Pillsbury products, for which Godrej Foods holds the rights.

The company's net worth as on March 31, 1998, stood at Rs 12.09 crore (Rs 29.97 crore in the previous year). Sales were stagnant at Rs 274 crore against Rs 273 crore in theprevious year.

Godrej Foods has in place a joint venture with Pillsbury called Godrej Pillsbury. It also has a presence in the edible oils' segment through brands its Godrej Sunflower and Cooklite brands.

The country's edible oils market went through an upheaval last year with the centre deciding to bring imports under the open general licence (OGL) list and the Reserve Bank of India (RBI) relaxing selective credit control norms.

After this change in October 1996, import of edible oils boomed, totalling about 17 lakh tonnes last year against an estimated demand of 10 lakh tonnes. This created a glut in the market, putting tremendous pressure on the company's margins.

This, coupled with the rupee-dollar exchange rate fluctuations--which after remaining stable for almost two years, started recording adverse movements--affected the thin-margin business further.

"With the opening up of the industry a number of players who had entered the market had to beat a hasty retreat. Being part of the industry,though with a good track record, your company also suffered due to the above," Godrej said in the report.

Despite the above problems, Godrej said the management is confident about the company's prospects in the medium or the long term and will overcome the present difficulty.

This year the management has decided to cover all foreign exchange risks and with the reduction in the number of players, the situation of glut is not likely to occur, resulting in better margins for the company, Godrej said.

With the Mysore unit commencing commercial production the company does not need to produce in large volumes in anticipation of big demand. It can afford to wait and produce when the demand arises thereby reducing the risk of outdated stocks.

In view of an increase in the company's business and operations, the board is seeking shareholder's approval to hike the borrowing limit to Rs 150 crore from Rs 100 crore.

Slim chances of enhanced performance:

This is not the first year that Godrej Foods hasnot performed well. In 1996-97, it was saved by income generated from business restructuring, which resulted in an income of Rs 15.15 crore. But for this income, it would have suffered a 9.5-crore loss.

In 1997-98, the company witnessed a negative cash flow of Rs 46.89 crore against a positive cash flow of Rs 25.54 crore in 1996-97. The only hope for the company in the long run is the likely announcement of compulsory packaging and branding of oils. This, however, may take a long time. Even if it does, the question is whether the company will survive to reap the riches.