In 2005, the term ‘impairment charges’ was new. Tata Steel introduced it to India Inc. For the fiscal FY15, it had to write down a total of Rs.6500 crore and this was explained as impairment of a unit in the UK, a part of its European operations and a coal project in Mozambique. This pushed the company into the red.
In the same year, Vedanta, in the January-March quarter wrote off Rs 19,180 crore as non-cash impairment charge for acquisition goodwill of Cairn India following slump in global crude oil prices.
In Jan-March quarter of 2017, Cipla posted a loss after it added a one-off non-cash impairment charge of Rs 2,142 crore related to litigation expenses.
In Dec 2019 quarter, Dr Reddy’s Laboratories posted a loss of Rs 570 crore due to impairment charge for non-current assets, including generic Nuvaring drug.
Impairment hits were far and few in between. But in Q4FY20, we see that this has become a norm with more and more companies going the impairment route due to the pandemic.
An impairment is triggered off the moment the market price of an investment on the balance sheet falls below the carrying value. Companies are usually not very quick to take this impairment hit as obviously it reflects poorly but more importantly, the promoters usually feel that the fall in value is temporary. But in today’s time, the fall in value of investment is not for just quarter; it could prolong into one or two quarters and that’s why companies are not shy of taking this hit right away. Given the uncertainty in cash flows means that impairment is inevitable.
Impairment not only reduces the value of assets on the balance sheet, it also lowers earnings in the income statement.
So keep a watch on most companies taking a hit on account of this impairment. This will come usually in three forms –
1: Impairment of non-financial assets – Goodwill, intangible assets, immovable properties and fixed assets.
2: Impairment of Loans & receivables – depending on the recoverability of loans and receivables, a write-off or provision bad debts is created.
3: Impairment of Investments – long term decline in value of investments
If a company did not show impairment in Q4FY20, keep a watch for Q1 where many more companies are likely to see an impairment. Even companies that recognized some impairment for first quarter, could see further erosion in valuations by the end of June.
While most of India Inc might sail through some calm and some rough waters in Q4 earnings, Q1 will be stormy. Thus the huge impairments which we are already seeing now could be a prelude to the deluge that lay ahead in Q1.