In an environment when metal companies are facing problems due to slackening demand,Hindalco,an Aditya Birla group company is now facing a problem of erosion of its networth. Novelis,a 100 per cent Canadian subsidiary of Hindalco,has reported a net loss of $1.8 billion in the third quarter of this financial year,including non-cash,pre-tax charges of $1.5 billion for asset impairments.
Hindalcos board of directors has approved a financial restructuring exercise aimed at writing off the losses by using funds from its securities premium account,which,according to industry analysts,will erode the net worth of the company. The $1.8 billion loss also includes $472 million of unrealised losses on derivatives,which hedge exposure to commodities and foreign currencies.
Hindalco would write down the loss through a court-sanctioned scheme,which would then have to be approved at an EGM. The aluminium manufacturer had,in a filing with Sebi earlier,said that as of June 30,2008,the goodwill in Novelis’ books totalled $1.86 billion. Hindalco’s move to write off the goodwill could have been backed by the need to “impair the asset,” which is done when the carrying cost of assets exceeds its recoverable value.
An impairment loss is recognised as an expense in the profit and loss account in the year in which an asset is identified as impaired.
Novelis is the first company that has been hit by goodwill impairment in India,the reason being meltdown in the financial markets and then in the real economy, said group executive president and CFO of Hindalco Sunirmal Talukdar. Hindalco’s shares slipped 1.54 per cent to close at Rs 41.55 on the Bombay Stock Exchange on Wednesday.
The company would create a separate fund Business Reconstruction Reserve Account out of its share premium account to offset the losses suffered by the company on international acquisition and domestic expansion and would not exceed the amount in the share premium account as on December 31,2008. We have set a cap to the amount which is the share premium account of around Rs 8,600 crore. We will not cross that limit and a call will be taken by the board. Moreover,later if we find that there is unutilised balance in the business reconstruction reserve,we will then reverse it back to the share premium account, Talukdar said.
According to experts,the two methods for this write off will be either the company gets regulatory approval to take the write offs through the share premium account or (if approval is denied) a loss of $1.5 billion will be shown in Hindalco’s profit and loss account. In either of the cases,Hindalco’s net worth will be impacted, said an analyst.
Hindalco had acquired Novelis for an enterprise value of $6 billion in February 2007. To finance the takeover it had taken bridge loans of $3.03 billion from a host of banks. In 2008,Hindalco raised Rs 5,000 crore through a right issue to existing shareholders on rights basis to help replace the bridge loans. The rights issue,however,devolved on the promoters.