Audit alarm rings for Oppo, Realme as Indian units struggle with missing records, negative net worth

Auditors of the India units of Chinese smartphone manufacturers Oppo and Realme have flagged multiple concerns regarding their bookkeeping, processes, and incomplete records, according to Registrar of Companies (RoC) filings earlier this month.

Analysts said auditor reports and observations have significant implications for stakeholders, including investors, creditors, and regulators. This comes at a time when the Chinese brands have been under intense regulatory scrutiny in India for the past four-five years, with the government alleging several irregularities such as customs duty and income tax evasion as well as money laundering.

Turned a Profit in FY24

Investigations and court cases are ongoing. Oppo Mobiles India and Realme Mobile Telecommunications India, wholly owned by their Chinese parents through entities based in Hong Kong, didn’t respond to queries.

The auditor of the Oppo unit, India’s third-largest smartphone brand, said in the RoC report that the company incurred substantial accumulated business losses in earlier years, resulting in negative net worth. It said the debt-equity ratio is adverse, raising significant concerns about financial stability and the ability to meet obligations. Oppo India’s net worth is a negative ₹3,551 crore as of FY24, according to the filing.

“The company is involved in material litigations and is subject to ongoing regulatory inquiries, outcomes of which are uncertain and could have a material impact on its financial position and operations,” the auditor said in the filing. “These events and conditions indicate the existence of material uncertainties that may cast significant doubt on the company’s ability to continue as a going concern.”

Oppo India’s non-current borrowings stood at ₹2,082 crore in FY24, including external commercial borrowings from its parent of ₹1,668 crore and working capital loans from HSBC Bank of ₹414 crore, according to the RoC data. Current borrowings were at ₹2,085 crore.

Despite the negative net worth, equity funding from the parent may be a challenge for Oppo since it will require Press Note 3 clearance from the government, a long-drawn process that may not succeed. This refers to the rule that foreign direct investment (FDI) from countries sharing a land border with India will need government approval, which came into play amid a rise in tensions with China in 2020.

However, Oppo India said in the filing that the company was profitable in FY24 and assured it will be able to generate sufficient profits and cash flows to operate as a going concern. It said the management is confident about bridging any “cashflow mismatches” through working capital management and short-term funds from banks or its parent.

The company paid ₹1,336 crore in FY24 as customs duty under protest over the disputed classification of goods and valuation issues, all of which is under litigation.

In the case of the Realme unit, India’s fifth-largest mobile phone brand, the auditor flagged lapses in procedures and record maintenance. The auditor was also not sure about the accuracy of accounts under certain heads and the completeness of the company’s FY24 profit and loss accounts.

The auditor wasn’t able to “obtain sufficient and appropriate audit evidence regarding the accuracy of purchase of traded goods recorded in the statement of profit and loss due to unexplained purchase price variances, auto approved system generated purchase orders and unverified goods receipt notes,” it said. “Consequently, we are unable to determine whether any adjustments might be required to the purchase of traded goods, inventory valuations, and their resultant impact on the balance sheet, statement of profit and loss, and the net cash flows from operating activities reported in the cash flow statement.”

Concerns were also raised over inadequate supporting documents maintained by Realme for payments to contractual employees, including provident fund and employee state insurance contributions besides the lack of “audit evidences” regarding advertisement expenses.

The auditor further said Realme India has a process of recording multiple invoices together through a single voucher related to expenses shown under the “other expenses” head. “Further, the same nature of expense has been booked into different heads,” it said. Due to this, the auditor was unable to ensure completeness of the accounts for FY24.

Realme said in the RoC filing that the board had taken note of the auditor’s observations and that it has put in place the necessary remedial procedures and processes and will continue to take steps in this regard.

Mohit Yadav, founder of business intelligence firm AltInfo, said Oppo India’s profitable operation is trapped in a distressed balance sheet and facing a liquidity crisis, with current liabilities nearly double current assets. Auditors flagging serious concerns at Realme India about purchase price mismatches, unverifiable ad expenses, and incomplete records point to “underlying weaknesses” in financial discipline, he said.

The latest RoC filings show both Oppo India and Realme India turned around their financials in FY24—the first posted a net profit of Rs 1,420 crore compared with a loss of Rs 1,273 in FY23. Realme India posted a net profit of Rs 154 crore in FY24 against a year-ago loss of Rs 1.9 crore.

Realme India ventured into wholesale distribution in FY24 which led to a massive surge in sales, it said in its RoC filing. Industry executives said till then, Oppo India was undertaking sales of Realme handsets.