Vedanta books Rs 20,000-cr impairment charge on oil business

India Inc's biggest impairment, on lower crude oil prices

Anil Agarwal-led Vedanta (earlier known as Sesa Sterlite) on Wednesday announced corporate India's largest ever Rs 20,000-crore goodwill impairment charge for loss of value of Cairn India, its oil & gas business subsidiary, triggered by an unprecedented fall in oil prices.

“Our decision of goodwill impairment was a result of declining pattern in crude oil prices along with the trend seen among global oil & gas companies, which closed their accounts for the calendar year with asset impairment,” Tom Albanese, chief executive officer of Vedanta said at the earnings conference call. Sesa Sterlite fell a little over two per cent to Rs 207 a share on the BSE exchange on Wednesday. The results were announced after the stock exchanges closed.  

With this impairment charge, Vedanta tops the list of Indian and multinational companies that took goodwill and impairment charge on their Indian assets as business tide turned against these. The list includes Vodafone, BP and Tata Steel (see chart).

Vedanta said crude oil prices, down by nearly half in the last few months, also compelled Cairn India to exit its Sri Lanka operations, adding another Rs 505 crore to the total impairment charges.

Until recently, Cairn India was a major cash cow for Vedanta, to the extent that Chairman Anil Agarwal was also mulling the option to merge the entity into the flagship group company, thus paving the way to create a global natural resources mining giant to rival Rio Tinto and BHP Billiton.

“We regularly test our asset value half-yearly and since oil prices had significantly fallen in the last few months, we realised the oil and gas asset needed to be valued lower from value it carried. This is a one-time goodwill impairment we have taken and will not be able to uplift asset value even if oil prices move up,” said Chief Financial Officer D D Jalan.

Vedanta does not see much change in crude oil prices and expects these to remain in the range of $55-65 a barrel. “Unless OPEC [Organization of the Petroleum Exporting Countries] plans to cut its production or if there is some geopolitical shock globally, we do not really see much change in crude oil prices in coming months,” said Albanese.

“Impairment happens when in accounting you realise the asset will not be able to bring in the cash flow to the extent expected. In such a scenario, you lower the asset value. In case of Sesa Sterlite, this was a prudent thing to do according to the accounting literature,” Shyamak Tata, managing partner (audit), Deloitte India, told Business Standard.

In the three months ended March, Cairn India reported its first quarterly loss in over seven years at Rs 241 crore, against a net profit of Rs 1,350 crore in previous quarter. Sharp rise in exploration costs, softening of crude oil prices and one-off charges pushed Cairn India into loss in the quarter. Till last year, however, Cairn was optimistic about its Mannar basin block in Sri Lanka and was planning to begin gas production from the block by 2017-18. In 2013, the company completed appraisal and commercial studies to determine the next steps for the gas discoveries made in the block.

Globally, oil giants such as BP and Royal Dutch Shell have also taken write-offs in the last couple of years.