Cairn $3bn writedown drags Vedanta into red

Vedanta, the Indian resources group, has revealed the largest writedown in Indian corporate history after it cut nearly $3bn from the value of its subsidiary Cairn India.

London-listed Vedanta Resources, which bought a majority stake in Mumbai-based Cairn India for $9.6bn in 2011, blamed weak oil prices for the decision, which it announced as part of underwhelming full-year results.

The writedown was prompted by "a steep fall in crude oil prices", said Tom Albanese, Vedanta chief executive, while reassuring that "this has no impact on the production or future earnings capacity of these assets".

When Vedanta, which has most of its operations in India, acquired Cairn India from Cairn Energy the price of crude oil was above $100 a barrel while today it is closer to $60, and analysts expect the low price to weigh further on the stock.

However, not all analysts see Cairn's lower value as materially important in itself.

"You just knock goodwill off the books, it doesn't change very much. Cash flow is the same, nothing changes as far as the company is concerned," said Sanjeev Prasad, Mumbai-based head of Kotak Institutional Equities.

Vedanta is also not alone in its pain with international energy groups such as BP and Petrobras both taking impairment charges due to the lower oil price, among other factors.

The largest previous writedown by an Indian company was Tata Steel's $1.6bn repricing of its struggling European division in 2013, which it blamed on broad-based economic factors.

Vedanta reported revenues came to Rs734bn ($11.5bn) in the 12 months to March 31, up marginally on a year-on-year basis, while earnings before interest, tax, depreciation and amortisation fell 13 per cent to Rs222bn.

Without the Cairn writedown, and various other impairments, Vedanta said it would have made a profit of Rs122bn ($1.9bn) for the year.

Although analysts think a further writedown of Cairn can be avoided - with Vedanta building a much more conservative oil price into its new projections - a simplification of the group's structure appears to be on the horizon.

"That is one of the stated group objectives, at some point they will want to merge Hindustan Zinc [another cash generative company owned by Vedanta] and Cairn to simplify the group structure," said Chirag Shah of Barclays.

"The biggest problem that Vedanta faces is that you have two cash flow generating entities, Hindustan and Cairn, both sitting on a pile of cash, and a standalone parent that is sitting on a pile of debt," added Mr Shah.

Anil Agarwal, Vedanta's founder and chairman, saw the acquisition of Cairn India as a way to transform his company into a natural resources group, rather than a pure play mining company. Part of that strategy involved building a diversified balance sheet.

However, there is scepticism as to whether any restructuring involving Cairn India can go ahead before Vedanta and Cairn Energy sort out their tax troubles with the Indian government.

Both Cairn India and Cairn Energy have been hit with multibillion-dollar demands for unpaid tax and interest from India's revenue authorities. Cairn Energy, which retains a 10 per cent stake in Cairn India worth $700m, has been unable to sell because of the tax dispute.

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