Impairment of Vedanta assets to reduce book value

MUMBAI: The massive depreciation that billionaire Anil Agarwal’s Vedanta Ltd recorded on its books in the March quarter will significantly reduce the company’s book value, market experts have told Mint. It is not yet known whether this will affect the company’s ongoing delisting process.

On Saturday Vedanta reported a net loss of ??12,083 crore for January-March compared to a profit of ??3,218 during the period last year. Even though revenue was down 15% year-on-year for ??19,513 crore for the quarter, the massive quarterly net loss was attributed to a write-off of ??17,132 crore on depreciation of assets in oil and gas, copper and iron ore companies.

An asset is impaired, or its value is written down on the books of the company, when its projected future cash flows are less than its current book value. Vedanta shares were beaten in the first half of this year, as were other commodities players, during the covid-19 pandemic which saw lockdowns in countries leading to a slowdown in economic activity and hence the demand for raw materials.

US crude oil prices briefly turned negative for the first time in April due to an overabundance and lack of adequate storage. The prices of most industrial metals were hammered in March and April, with the biggest drops seen for copper and zinc, key metals for Vedanta in India.

Meanwhile, the company is in the process of withdrawing from Indian stock exchanges at an offer price of ??87.5. The company’s share price, since the delisting announcement last month, has remained above the offer price, indicating that shareholders believe the intrinsic book value of the company should. reflect a price higher than the delisting offer. The stock closed at ??105.35 on BSE Friday.

“Depreciation is just an accounting entry,” independent market analyst Dharmesh Kant told Mint.

“It is at the discretion of management to do so. According to international practice, assets are measured at book value or at net realizable value, whichever is lower. These impairments can be written off over time. to come when (commodity) prices rise, leading to an increase in net realizable value … I don’t think this depreciation statement will affect the write-off price and influence shareholders during the process of building reverse books for price discovery, ”Kant added.

He said it might be difficult for the company to delist because many retail and institutional shareholders might not want to tender their shares.

“The depreciation caught the attention of investors,” a senior industry analyst told Mint, who declined to be quoted. “While some individual businesses within Vedanta have done well, such as aluminum, steel and power, the focus will now be on asset value. Institutional shareholders did not want to tender their shares at the offer price because they believed the book value was higher. Now, with the depreciation, the company has been able to reduce the book value. However, no other commodity company in the world experienced such a large commodity depreciation during the March quarter, especially when global crude oil prices rebounded last month. “

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