Weak aluminium prices take shine off Vedanta's December quarter performance

Vedanta’s December quarter performance bore the brunt of soft commodity prices, as expected, even though continuing volume growth and control over costs managed to offset some of the weakness.

Average aluminum prices (including premium) were down 5 per cent sequentially and 7 per cent year-on-year (YoY) to $2,051 per tonne during the quarter, at the London Metal Exchange. Further, zinc prices at $2,631 a tonne were 19 per cent lower YoY, though they improved 4 per cent sequentially.

Apart from weak prices, a revenue decline of 3 per cent YoY, to Rs 23,669 crore, was led by the shutdown of the Tuticorin copper smelter. What helped offset the weakness partially was currency depreciation, along with higher volumes at Electrosteel and the aluminium business. These led to a 4 per cent sequential growth in revenues.

The impact of lower commodity prices and rising costs, however, was more on the operating performance, given Ebitda declined 11 per cent YoY to Rs 5,953 crore. Nevertheless, the company’s efforts in controlling costs, rising volumes, and contributions from Electrosteel, helped it achieve a 13 per cent rise in Ebitda sequentially.

Ebitda was helped by a write-back of Rs 320 crore. Further, higher treasury income helped other income rise significantly to Rs 1,398 crore (Rs 574 crore in Q3FY18 and Rs 481 crore in Q2FY19). Therefore, the company’s net profit at Rs 1,574 crore came ahead of consensus estimates of Rs 1,437 crore.

The firm’s largest contributor —aluminium segment (almost a third) — though, is helping sustain growth, driven by higher volumes. In addition, the company’s per tonne cost of production (COP) declined sequentially from $2,125 to $1,909. Vedanta is targeting reduction to $1,500.

The COP will improve further in the next quarter, on improvement in coal linkage (49 per cent in Q1 to 72 per cent in Q3), increase in bauxite sourcing (8per cent to 40 per cent from Q1 to Q3), and decline in alumina COP from $341 to $308 a tonne. However, prospects continue to hinge on aluminium prices.  

Vedanta’s second largest contributor Zinc India (nearly a fourth of overall) is also benefitting from rising volumes and declining COP.

However, the movement in zinc prices is key. Zinc International is likely to see better prospects, with the first shipment from Gamsberg mines starting in December 2018. Positive developments on the restart of the Tuticorin plant will rub off on the copper business. However, investors will be looking at clarity on Cairn India Holdings’ investments of  Rs 1,431 crore in Anglo American PLC.