Feature

Waiting To Explode

Swelling exceptional items are a clear and present danger to investor wealth  

Illustration: Kishore Das

To be crude, the commodity downcycle is far from over. Similar is the case for industrial metals, who have been hit by lower demand. In such a scenario, the stress has been manifesting itself in the form of exceptional items. For the nine months ended December 2015, write-offs stood at Rs.16,854 crore. Already higher than the Rs.13,063 crore (2.3% of operating profit) written-off in FY14, the number is expected to swell once the March quarter numbers are out. 

The stress in the system over the last two fiscals can be gauged by the fact that write-offs by BSE200 companies (excluding banks, financials and companies with exceptional gains) in FY15 stood at a mammoth Rs.44,228 crore. This was over 8% of the operating profit and 3.5% of the sales turnover of Rs.1,254,000 crore. 

JN Gupta Co-founder, Stakeholders Empowerment ServicesSlippery slope
Not surprisingly, the energy sector has seen the most pain, logging exceptional items of Rs.5,463 crore till Q3FY16. Of this, ONGC has written-off close to Rs.3,994 crore, citing impairment losses due to the fall in crude price. According to the company, the severe industry downturn has hit the cash generation capacity of some of its oil and gas assets or in other cases, led to reduction in book value.

Meanwhile, impairments have been on the rise in the metals and mining space too. In the December quarter, JSW Steel took an impairment hit of Rs.5,600 crore. This was due to losses at its US plate and pipe plant (bought from Jindal Saw in 2008) on account of high operating costs and lower steel prices. Tata Steel also continued to report impairment losses in FY16, largely on account of its European business. Not just impairments, the collective write-offs were at Rs.3,600 crore in FY16, second only to oil companies. This is similar to FY15 when oil and gas companies made up 70% of the total write-offs, followed by metals at 18%. 

Another victim of tepid demand has been the infrastructure space. Reliance Infrastructure wrote-off close to Rs.3,104 crore, largely due to losses because of termination of the Delhi Metro contract. 

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