India Inc sees asset impairment surge to Rs 1.6 trn as slowdown bites

Metals, mining and energy major Vedanta tops the list with asset impairment worth nearly Rs 50,000 crore since FY15 as it slashed the fair value of its investment

As slower growth over the past few years bites India Inc, an increasing number of companies have taken a haircut on their investment in subsidiaries and joint ventures. India’s top companies have taken impairment charge of nearly Rs 1.6 trillion in the past 10 years — most of it in the last four-five years — as diversifications and overseas ventures failed to live up to expectations.
 

Mahindra & Mahindra is the latest company to bite the bullet as it wrote down the fair value of equity investment in Ssanyong Motors and US two-wheeler business by around Rs 1,800 crore and reported its first quarterly loss in nearly 19 years. Metal, mining and energy major Vedanta tops the list with assets impairment worth nearly Rs 50,000 crore since FY15 as it slashed the fair value of its investment. The oil and gas business has been the biggest drag for Vedanta, leading to a sharp write-down in the value of erstwhile Cairn India that it had acquired in 2011.
 

The company first took an impairment charge in March 2015 when it wrote down its investment in Cairn India by nearly Rs 20,000 crore, followed by another impairment charge worth Rs 12,000 crore the following year. In FY20, the company once again took an impairment charge of around Rs 16,000 on its oil and gas business due to sharp fall in crude oil prices international market after the Covid-19 pandemic.
 

Vedanta had acquired Cairn for around Rs 50,000 crore in 2011 when Brent crude oil was trading at $108 for a barrel. The prices began to correct sharply beginning 2014 resulting in a sharp fall in the profitability and the market value of oil and gas assets globally. In FY17, Reliance Industries took an impairment charge of nearly Rs 40,000 crore as its wrote the fair value of its domestic oil and gas fields and shale gas assets in the US.

Tata Steel has been steadily writing down the fair value of its Rs 54,000-crore acquisition of Corus (now Tata Steel Europe) in 2007. The steelmaker has taken cumulatively impairment charge of around Rs 33,000 core since FY13.
 

In FY19, another Tata Sons’ subsidiary Tata Motors took an impairment charge of around Rs 28,000 crore on its investment in British luxury passenger car and sports utility maker Jaguar Land Rover (JLR).
 

According to analysts, on the face of it, impairment charge is a non-cash loss and doesn’t have an immediate impact on a company’s operations and cash flows. Also, the stock price may not react immediately to the news of an asset write-off, as it leaves a company’s earnings per share unchanged.

 

Asset impairment, however, weighs on the stock valuation in the medium to long term, as it leads to a decline in the company’s net worth or book value. This, in turn, affects the company’s price to book value ratio, which is an important valuation metric especially for companies in asset heavy sectors such as telecom, metals, mining, and oil and gas, and other commodity sectors.

Rating agencies also take note of large asset impairment as it reflects poorly of the asset’s cash generating ability. In 2015, Moody’s found Vedanta’s impairment in Cairn India as credit negative since it implied a longer payback period for the acquisition. Subsequently, Vedanta’s share price fell sharply between FY14 and FY16, in line with a decline in its net worth after the asset write-down in FY15 and FY16. Interestingly, the Rs 29,000-crore decline in Vedanta’s market capitalisation during the period was nearly matched by a similar decline in its net worth. Its net worth on a consolidated basis declined to around Rs 44,000 crore at the end of March 2016 from around Rs 73,000 crore at the end of March 2014.
 

In the past two years, there has been a sharp fall in Tata Motors’ market capitalisation in line with a decline in its net worth post asset impairment. In FY19, its market capitalisation fell by around Rs 45,000 crore against Rs 35,000 crore in its net worth during the period.
 

Reliance Industries has been an outlier – the impairment neither impacted its financials nor its stock price, which has appreciated significantly.
 

A decline in net worth also worsens a company’s balance sheet ratio especially the debt to equity ratio, which also weighs on its stock valuation. A company with higher debt to equity ratio trades at a discount to its industry peers with lower leverage ratios. This makes it tough for it to raise additional equity capital from the market hampering its growth plans.