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Business News/ Companies / News/  Vedanta’s $3.1 billion Cairn India impairment credit negative: Moody’s
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Vedanta’s $3.1 billion Cairn India impairment credit negative: Moody’s

Moody's says the cash flows from Cairn India are not going to be as healthy as they used to be

Moody’s cited the $3.1 billion goodwill impairment charge taken by Vedanta on its acquisition of Cairn India as a reason for Vedanta management not being bullish on the oil and gas business any more. Photo: ReutersPremium
Moody’s cited the $3.1 billion goodwill impairment charge taken by Vedanta on its acquisition of Cairn India as a reason for Vedanta management not being bullish on the oil and gas business any more. Photo: Reuters

Mumbai: Vedanta Ltd, the erstwhile Sesa Sterlite Ltd, might find it difficult to repay the debt raised to acquire its oil and gas subsidiary in India, Cairn India Ltd, in 2011 as the cash flows from the latter are not going to be as healthy as they used to be, ratings agency Moody’s Investors Service Inc. said on Monday.

Moody’s cited the $3.1 billion goodwill impairment charge taken by Vedanta on its acquisition of Cairn India as a reason for Vedanta management not being bullish on the oil and gas business any more.

“Vedanta Ltd owns 59.9% of CIL (Cairn India), which it purchased in 2011. The $3.1 billion impairment is credit negative for Vedanta Resources Plc, which owns 62.8% of Vedanta Ltd, because it implies a longer payback period for the acquisition and increases the challenge of repaying $4.4 billion of acquisition debt financing from its operating cash flow," said the ratings agency.

It said that the impairment—which is one of the biggest in corporate India’s history and 35% of the original acquisition price—highlights the eroded value of its oil and gas assets since 2011.

A mail seeking Vedanta’s response remained unanswered.

Cairn India, which contributes almost 50% to the overall operating profit of Vedanta’s parent company Vedanta Resources Plc, had to cut its capital expenditure plans for the current and the next fiscal years due to falling crude oil prices globally and a muted future outlook. The company also guided no growth in its crude oil production for fiscal years 2015-16 and 2016-17 from its flagship Barmer basin in Rajasthan.

On 29 April, citing concerns of sustained low crude oil price, Vedanta took a $3.1 billion good impairment charge on its acquisition of Cairn India. “This charge has arisen from a downward revision in the carrying value of assets on account of lower oil prices," said a company note on Wednesday.

“Although the non-cash write-down will not immediately affect key credit ratios, it reflects the lasting effect of the lower oil prices on Vedanta’s business profile, which underpinned our change to its rating outlook to negative from stable in January," said Moody’s on Monday, adding that the impairment reflects the high price that Vedanta paid for Cairn India in 2011

The sharp decline in Cairn India’s value is mainly due to a 49% drop in the price of crude oil realized by the company, which averaged at $48.6 per barrel for the fourth quarter of the last fiscal year from $95.7 per barrel seen in the year-ago period, according to Bloomberg.

While the concern of low crude oil prices was looming large on Cairn India, a recent 20,000 crore tax demand on the company also sent its shares spiralling in March from an already low level.

Moody’s had pointed out on 18 March that if Cairn India is made to pay the tax, it would affect Vedanta Resources Plc’s ability to meet its long-term financial obligations.

Post the announcement of impairment, analysts had cut the revenue and profit guidance of Vedanta due to a cut in its Cairn’s guidance by the management.

“Consolidated Ebitda (earnings before interest, tax, depreciation and amortization or operating profit) estimates for FY16 and FY17 stand lower by 11% and 10%, respectively, on account of cut in Cairn India’s earnings," said a 29 April report by Elara Securities (India) Pvt. Ltd.

It said the operating profit of Vedanta in the current fiscal year is expected to be 19,000 crore and is expected to reach the 2014-15 level of 22,000 crore in the next fiscal year.

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Published: 04 May 2015, 01:26 PM IST
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