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APR 30 2015

Vedanta reports $3 bn goodwill impairment charges related to oil, gas biz, biggest in India's corporate history

  • Economic Times, ET Bureau / Hyderabad
  • Created: Thu 30th APR 2015

Vedanta Ltd, formerly Sesa Sterlite, reported India's biggest impairment charge, slashing the value of its 2011 Cairn India acquisition by a third, or $3 billion.

 This was booked as non-cash value destruction in terms of goodwill and was attributed by Vedanta to the crash in oil prices.

 The company reported exceptional items of Rs 19,956 crore for the quarter ended March 31 on Wednesday as part of its earnings announcement. It posted a loss of Rs 19,230 crore for the quarter, but the impairment doesn't reflect in this figure as it's treated as a book entry.

 Companies usually write down assets to reflect a more accurate value of their business.

Vedanta reports $3 bn goodwill impairment charges related to oil, gas biz, biggest in India's corporate history

"Global oil & gas majors close their account in the January-December calendar year where they record asset impairment," Tom Albanese, CEO of Vedanta Resources, said in response to a question on the timing of the move. "We saw a necessary asset (re)valuation for Cairn in our fourth quarter since we have seen a fallback in oil prices."

 Vedanta acquired Cairn for $9.1 billion four years ago when a barrel of Brent crude was at $108. Vedanta founder Anil Agarwal, having built up a business in metals, made the dramatic move into oil &gas with the bid for Cairn India.

 The purchase of Cairn India was in pursuit of Agarwal's dream to create a metals and oil & gas giant similar to BHP. In March, Brent crude was priced at $58 a barrel. ET was the first to report on Wednesday about the impairment charge, which amounted to Rs 19,180 crore (about $3 billion).

 "The carrying value and goodwill in our books was not feasible at the current price scenario," said DD Jalan, chief financial officer, Vedanta Resources. "This is a one-time impairment charge and we did the impairment model on the basis of conservative oil prices. If prices improve, we cannot change our impaired value. We cannot write back the impairment, unlike under IFRS (International Financial Reporting Standards)."

 Indian accounting rules don't allow such charges to be reversed. A separate impairment charge of Rs 505.2 crore was made in respect of exploratory wells in Sri Lanka as the development of the block was not commercially viable at current prices, Vedanta said in a statement.

 "This is huge...It is not good news," said a senior executive affiliated to one of the big four consulting firms, referring to the record impairment. This also meant that Vedanta believes oil prices will remain soft for another twothree years, he said, adding that it was a permanent erosion in the value of assets. The net worth of the company has declined, a loss in terms of acquisition that is not recoverable, he said. He did not want to be named because his firm is working with Vedanta.

 An investor pointed out that this was a normal business process. "It's just goodwill getting marked down to reflect the true value of the asset," said Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities.

 Wave of write-downs

 The slump in oil prices has prompted a wave of such writedowns across the world. Brazilian oil company Petrobras earlier this month announced a $17-billion write-down. BP, the British oil & gas giant, did likewise in February 2015 by paring its $7.2-billion investment in Reliance Industries' Krishna-Godavari gas business by writing off $830 million.

 For natural resource companies that bought assets when prices were buoyant, such impairments have been a regular feature, an analyst said. Over the past few quarters, companies from BP and Royal Dutch Shell in the oil sector to miners such as Rio Tinto, Glencore and BHP have posted impairments running into more than $30 billion.

 Companies revisit the cost of assets annually and take a call on whether value has eroded.

 In May 2013, Tata Steel announced a goodwill impairment charge of $1.6 billion on account of the loss of value of its Europe steel business under Corus and other foreign assets due to a slump in overseas demand.

 "An impairment refers to any erosion in the value of an asset, including an intangible asset like goodwill," said Raj Bagri, partner at Doshi, Chatterjee, Bagri & Co.

 Vedanta's oil & gas operations consist of the assets of Cairn India in India, Sri Lanka and South Africa, according to its website.

 Vedanta Ltd, the Indian listed subsidiary of Vedanta Resources Plc controlled by Agarwal, owns 58.9% of Cairn India.


Daman and Diu Daman and Diu Gas Cairn India Oil Shell Vedanta Sterlite Royal Dutch Shell Europe India

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