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Home / Companies / Company-results /  Vedanta posts Rs18,718 crore loss

Mumbai: Oil and metals firm Vedanta Ltd, formerly known as Sesa Sterlite Ltd, reported a heavy fourth-quarter loss because of a 19,180 crore non-cash charge for impairment of goodwill related to the company’s acquisition of oil and gas explorer Cairn India Ltd.

On Wednesday, Vedanta reported a consolidated loss of 18,718 crore in the quarter ended 31 March against a profit of 3,074 crore in the year earlier. The one-time items included a “non-cash impairment charge of acquisition goodwill, in respect of the group’s oil and gas business aggregating 19,180 crore," said the company in the notes accompanying the earnings release. Vedanta acquired a majority stake in Cairn India from Cairn Energy Plc. in 2011.

“The impairment of goodwill was triggered by the significant fall in the crude oil price," the company added. Over the last one year, crude prices have fallen 40%, even though prices have rebounded from their lows hit earlier this year. On Wednesday, Brent crude prices were trading at close to $65.31 per barrel.

Cairn India, which was once the cash cow of the Anil Agarwal-controlled conglomerate Vedanata Resources Plc., had been battered badly by the fall in crude prices in the last one year.

And the outlook for Cairn India continues to remain bleak. “The company is not only in a bad shape due to fall in crude prices, the management has also said that there will be no growth in production over the next two years. This is worrisome outlook for the company," said Dhaval Joshi, an analyst with brokerage Emkay Global Financial Services Ltd.

An analyst with an international brokerage firm explained that in 2011, when Vedanta Resources bought 58.85% stake in Cairn India, it had shelled out $8.67 billion. At that time, the premium paid on the book value of the company was around $4 billion. Out of this premium, almost $3.2 billion has been written off on Wednesday.

Goodwill is an intangible asset. It is the value of brands, patents, customer loyalty, competitive rank and other intangible assets that a company might own. Goodwill is recorded on the assets side of a balance sheet at fair value. Goodwill is said to have been impaired if the fair market value is less than the carrying value.

“Broadly explained, a company is required to assess the carrying value of its assets and match it with the discounted cashflow generated from that group of assets. In case of a major mismatch, signifying that the carrying values of assets exceed cash flows impairment is taken. Companies are required to do this in regular intervals or when there is major change in market dynamics," said Shyamak R. Tata, a partner with Deloitte Haskins & Sells Llp.

Tom Albanese, chief executive officer of Vedanta Ltd, in a conference call with reporters on Wednesday, said the global fall in crude prices was the reason to time the impairment for the March quarter. “While the impairment is a disappointment, it is reflective of the current fall in oil prices," he said.

The firm said the impairment has been worked out at conservative oil prices as it does not have a provision to write back this impairment in case of a recovery in oil prices in the future.

“This is a one-time impairment and we have taken very conservative oil prices for running this impairment model. If the prices go up tomorrow, the impairment remains. The impairment on goodwill cannot be written back," said D.D. Jalan, chief financial officer, Vedanta.

Some see this, as an indication that Cairn India will no more be the main driver to the company’s profit.

“This reflects that the management has realized that Cairn India is no more the driver of the company’s bottomline. It was evident right after Cairn India’s results, today is just an acknowledgement," said S.P. Tulsian, an independent investment adviser.

Excluding one-time items, the company reported a net profit of 491 crore in the quarter ended March, a decline of almost 70% from 1,588 crore in the year earlier. Net sales for the March quarter declined 15% to 17,732 crore from 20,785 crore.

A Bloomberg poll of 12 brokers had estimated net profit at 663.10 crore, while a poll of 14 analysts had pegged net sales at 17,704.2 crore for the March quarter.

The firm undertook a major restructuring, merging copper maker Sterlite Industries with iron ore miner Sesa Goa, to form the current firm that came into being in August 2013. Therefore, the quarter under review has been compared with the adjusted results from the same quarter a year ago.

During the quarter, the company posted earnings before interest, tax, depreciation and amortization (ebitda) of 3,986 crore, down 40% from a year earlier because of lower commodity prices. Ebitda margin for the company also narrowed to 28% in the March quarter from 45% in the same quarter last year.

On Wednesday, Vedanta’s shares fell 2.15% to 207.15 on BSE, while the benchmark Sensex lost 0.62% to close at 27,225.93 points.

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