Vedanta mines profits in all segments

With realisations firm, higher volumes, cost optimisation & debt reduction are aiding profit growth

Vedanta’s trend of improving profitability continued in the December quarter as the company reported its highest operating profit margin in at least seven quarters. While operating performance was led by the zinc and aluminium segments, better cost controls and improving volumes contributed to profit growth.
 

During the quarter, average zinc prices on the London Metal Exchange at $2,511 were up 56 per cent year-on-year (y-o-y), while aluminium, lead, copper increased in the 8-28 per cent range over the same period. Even international iron ore prices have continued to firm up, helping Vedanta.

Zinc production and profitability led by Hindustan Zinc remains the largest growth driver. The 44 per cent increase in mined metal production coupled with higher realisations drove revenues and profits. For the zinc segment, profits before interest and taxes (PBIT) more than doubled from Rs 962 crore in the December ’15 quarter to Rs 2,133 crore in the December ’16 quarter. This is likely to continue given production ramp up at Hindustan Zinc and firm zinc price outlook.

The aluminium segment, too, has seen a smart rebound with the segment operating profit at PBIT levels doubling from Rs 152 crore in the September’15 quarter to Rs 366 crore in the reporting quarter; the operating profit in the December’ 15 quarter was Rs 3.22 crore. The continuing ramp-up of aluminium smelters is expected to drive volumes. The company indicated that the third line of the 1.25 million tonnes per annum (mtpa) Jharsuguda-II smelter commenced in December 2016. The outlook for aluminium prices continues to be firm.

Analysts at Edelweiss Securities believe the company is likely to benefit from a favourable outlook for zinc and aluminium prices due to global supply?side constraints and capacity ramp-up.

The iron ore segment, too, continues to see good traction lead by rising international ore prices as profits surged 40 per cent y-o-y. Vedanta has received additional 3 mtpa mining allocation in Goa for FY17 as it reached its annual mining production cap in January.

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These developments indicate Vedanta will see improved performance in the quarters ahead. Analysts at Elara Capital expect operating profit in the March quarter to improve sequentially led by higher ramp-up in volumes and realisations though aluminium could be partially hit by high alumina cost.

Higher profits and free cash flow should help tackle some of the high debt on the books. The company achieved gross debt reduction of Rs 1,828 crore and net debt reduction of Rs 447 crore during the quarter. CEO Tom Albanese said there was a continuous effort to strengthen the balance sheet by maximising free cash flow and reducing debt. Access to cash from Cairn India merger will provide flexibility to either reduce debt or pursue growth plans.

The stock hit a fresh 52-week high of Rs 265.95 on Friday before closing at Rs 263.40 levels. With earnings growth momentum to continue, there could be more upside especially given that global peers are trading at much higher valuations, according to analysts at Edelweiss Securities.