Write-downs to surge for companies as Covid hits demand

MUMBAI: An increasing number of Indian companies are staring at write-downs in their business this fiscal as they will be forced to record the demand-collapse for their products on profit and loss accounts due to the coronavirus pandemic.
They will have to provide for impairments starting June quarter, which could either pull their profits lower or push them into losses. Early signs of Covid-19-related impairment charges were visible in some entities when they announced their fourth quarter numbers for fiscal 2020. Industry watchers expect impairments to accelerate going forward.
Vedanta, for instance, took an exceptional charge of Rs 17,132 crore in the three months through March of fiscal 2020, mainly due to the Rs 16,576-crore impairment of assets in its oil and gas business, triggered by the fall in crude oil prices following the coronavirus outbreak.
“Impairments are triggered due to falling demand/revenue/profitability, rising losses, increased competition intensity, among other factors. The cumulative effect of which is to reduce the economic viability of the subject business,” said RBSA Advisors MD Rajeev Shah. “Where the subject business is into commodities, it suffers a double whammy, wherein falling demand immediately triggers fall in prices, putting the company in a miserable position.”

Since Covid-19 manifested in the fourth quarter of fiscal 2020, companies have been making judgments and estimates on the impact of the pandemic on their business and have been reflecting the same in their impairment assessments while finalising their annual accounts.
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“We don’t expect this (write-downs) to be a one-time impact as most companies will need to continuously monitor the situation and reassess the economic scenarios that could play out in the future,” said KPMG partner Sai Venkateshwaran. “Where the assessment continues to show a decline or a prolonged impact on business, companies may need to record further losses in the coming quarters and we can expect to see more of these reflected on a quarter-by-quarter basis rather than only in the last quarter of fiscal 2021.”
Generally, firms carry out asset impairment assessments as and when there is an indication of a possible impact from either external or internal indicators. However, for goodwill and intangible assets, companies typically carry out assessments in the fourth quarter as this coincides with the annual audit process.
Companies in the non-essential businesses — such as automobiles, hospitality, aviation and shadow banking — are expected to take impairments on inventories and recoverability of loans/receivables this fiscal.
RBSA Advisors MD Ravishu Shah pointed out that certain businesses had been weak even before the onset of Covid-19 and the pandemic has only made matters worse for them. These companies have taken impairments in the fourth quarter of fiscal 2020.
Globally, capital-intensive sectors like energy, airlines and steel have been hit the hardest with impairments. Last week, Microsoft announced that it will take an impairment charge of $450 million in the June quarter after it decided to permanently close all its brick-and-mortar stores due to the pandemic.