 "Impairment charges hit India Inc's Q4 profits")
The just-concluded earnings season has seen at least eight big firms take impairment charges of over Rs 100 crore each. While the trend is common during the fourth quarter, this is the first time so many firms have taken impairment charges (see chart).
Some have been pronounced, such as the Anil Agarwal-promoted Vedanta, which topped the list with a nearly Rs 20,000-crore impairment charge in the fourth quarter, followed by Tata Steel at Rs 4,923 crore and Jet Airways at Rs 1,172 crore.
"There are two key reasons why we are seeing this trend of impairment charges in the fourth quarter," said G Chokkalingam, former executive director of Centrum Wealth, who is the founder of Mumbai-based consultancy Equinomics Research & Advisory. "One is that acquisition or investment bets, as in the case of Tata Steel, JSW Steel or Jet Airways, have not yielded the desired result. The second reason being a global slowdown, which has hit commodity prices."
Saurabh Mukherjea, chief executive officer (CEO) for institutional equities at Ambit Capital, said, "After the National Democratic Alliance came to power last year, a number of companies overproduced, resulting in this write-down in the last few months of 2014-15. There was also overinvestment in capacities, which has now slowed."
Management comments justify this trend. Tom Albanese, CEO, Vedanta, said during the company's fourth-quarter earnings call, "Our decision of goodwill impairment was a result of the declining pattern in crude oil prices along with the trend seen among global oil and gas companies, which closed their accounts for the calendar year with asset impairment."
Koushik Chatterjee, group executive director (finance and corporate), Tata Steel, on the other hand, said, "The approximately Rs 5,000-crore impairment charge taken in the final quarter of the financial year mainly relates to the long-products UK business in Tata Steel Europe, apart from the write-down of investments in raw material projects in Mozambique, the Ivory Coast, and the Taconite project in Canada."
Chatterjee said the review was undertaken after taking into account the external economic environment, underlying demand-supply imbalance facing the global steel sector, volatility in iron ore and coal prices in the last 12 months and the long-term forecast of steel and raw material prices.
Executives at Jet Airways and JSW Steel, meanwhile, said impairment charges were taken on account of investment in subsidiaries. Jet Airways said the write-down was on account of a reduction in value of its investment in JetLite. The airline made a loss of Rs 2,465 crore in the same period of 2013-14 due to an impairment charge of Rs 700 crore. With the two impairment charges, the airline had written off its investment in JetLite, analysts said.
Some have been pronounced, such as the Anil Agarwal-promoted Vedanta, which topped the list with a nearly Rs 20,000-crore impairment charge in the fourth quarter, followed by Tata Steel at Rs 4,923 crore and Jet Airways at Rs 1,172 crore.
"There are two key reasons why we are seeing this trend of impairment charges in the fourth quarter," said G Chokkalingam, former executive director of Centrum Wealth, who is the founder of Mumbai-based consultancy Equinomics Research & Advisory. "One is that acquisition or investment bets, as in the case of Tata Steel, JSW Steel or Jet Airways, have not yielded the desired result. The second reason being a global slowdown, which has hit commodity prices."
Saurabh Mukherjea, chief executive officer (CEO) for institutional equities at Ambit Capital, said, "After the National Democratic Alliance came to power last year, a number of companies overproduced, resulting in this write-down in the last few months of 2014-15. There was also overinvestment in capacities, which has now slowed."
Management comments justify this trend. Tom Albanese, CEO, Vedanta, said during the company's fourth-quarter earnings call, "Our decision of goodwill impairment was a result of the declining pattern in crude oil prices along with the trend seen among global oil and gas companies, which closed their accounts for the calendar year with asset impairment."
Koushik Chatterjee, group executive director (finance and corporate), Tata Steel, on the other hand, said, "The approximately Rs 5,000-crore impairment charge taken in the final quarter of the financial year mainly relates to the long-products UK business in Tata Steel Europe, apart from the write-down of investments in raw material projects in Mozambique, the Ivory Coast, and the Taconite project in Canada."
Chatterjee said the review was undertaken after taking into account the external economic environment, underlying demand-supply imbalance facing the global steel sector, volatility in iron ore and coal prices in the last 12 months and the long-term forecast of steel and raw material prices.
Executives at Jet Airways and JSW Steel, meanwhile, said impairment charges were taken on account of investment in subsidiaries. Jet Airways said the write-down was on account of a reduction in value of its investment in JetLite. The airline made a loss of Rs 2,465 crore in the same period of 2013-14 due to an impairment charge of Rs 700 crore. With the two impairment charges, the airline had written off its investment in JetLite, analysts said.