Price volatility may cap the gains for Vedanta despite strong Q3

Despite strong Q3 earnings, improving margins and progress on demerger plans, volatile global commodity prices and high capex could restrain Vedanta's upside

The consolidated revenue (including discontinued operations) of Vedanta (VEDL) for the third quarter of 2025-26 (Q3FY26) was reported at ₹46,650 crore, up 19.3 per cent year-on-year (Y-o-Y) and 17 per cent quarter-on-quarter (Q-o-Q) enjoying higher London Metal Exchange (LME) prices, good zinc and power volumes, and forex gains.

 

The demerger is on schedule and the capex plans should yield positive results. Accounting reporting now reflects upcoming demerger, with aluminium, oil & gas, and iron & steel segment performances disclosed separately. Commodity prices are volatile. Global metal prices on the LME have just seen a correction. As a result, the stock has seen panic selling.

 

Consolidated operating profit (including discontinued operations) of ₹15,170 crore rose 34.4 per cent Y-o-Y and 30.6 per cent Q-o-Q with higher base metal prices, lower costs, and favourable currency moves. Operating profit margin was 32.5 per cent (28.6 per cent Q-o-Q and 28.4 per cent Y-o-Y).

 

Consolidated adjusted net profit (post-minority interest) of ₹5,930 crore increased 67.3 per cent Y-o-Y and 77.4 per cent Q-o-Q, and it was boosted by higher other income. Consolidated net debt decreased 2.3 per cent Q-o-Q to ₹60,620 crore, and net debt to operating profit dropped 1.2 times (1.4 times in Q2FY26).

 

On the operational front, the 435 kilo tonne per annum (ktpa) BALCO smelter and Lanjigarh train 2 are increasing capacity while Sijimali bauxite mine and Kurloi coal mine are to be commissioned in the first half of 2026-27 (H1FY27) and Q4FY26, respectively. Investors will have to consider variables such as Hindustan Zinc (HZ) performance, aluminium prices, and rupee depreciation when considering the stock.

 

VEDL achieved record alumina production of 794 kt (up 57.2 per cent Y-o-Y and 21.6 per cent Q-o-Q) and HZ's best ever Q3 mined metal production at 276 kt, up 4.2 per cent Y-o-Y. Aluminium had a net premium of $239 per tonne ($262 per tonne a year ago and $248 per tonne in Q2FY26) while value-added product sales were at 354 kt (up 11.7 per cent Y-o-Y).

 

Aluminium operating profit of ₹7,020 crore was up 54.7 per cent Y-o-Y (27 per cent Q-o-Q) due to higher LME prices and lower cost of production. The Q3FY26 cost of production (CoP) was $1,674 per tonne, lower by 10.9 per cent Y-o-Y and 8.3 per cent Q-o-Q, due to lower cost of alumina and power.

 

Management is guiding for further $50-60 per tonne reduction in aluminium CoP as captive alumina volume increases. The capex guidance for FY26 is $1.7 billion, of which $1.3 billion has been spent in the first nine months of 2025-26 (M9FY26).

 

Vedanta is hedging for margin protection. In Q4FY26, 125 kt of aluminium at $2,640 per tonne, 50 kt of zinc at $3,000 per tonne, and 68 tonnes of silver at $45 per troy ounce have been hedged, and for FY27, 490 kt of aluminium at $2,625 per tonne has been hedged. This provides a safety net against sharp price downtrends as have occurred recently.

 

Management targets net debt to operating profit of 1 time and aims at $6 billion of consolidated operating profit in FY26. Margins will be sustained by backward integration, new value-added product (VAP) aluminium products, and ideally, higher base metal prices. High capex and dividend payouts will limit deleveraging in the short-term. VEDL's demerger is expected to complete by April 2026 (with listings in May 2026). Demerger may unlock value but it could also lead to lower valuations given current trends.

 

Aluminium, which delivers 50 per cent of earnings, is well placed, given captive coal and bauxite scaling up. Silver has seen an extraordinary bull run. Zinc has delivered operating profit growth of 11.3 per cent Q-o-Q (and 17 per cent Y-o-Y). The oil & gas volume decline of 4.7 per cent Q-o-Q (down 15 per cent Y-o-Y) led to an operating profit decline of 4 per cent Q-o-Q (down 18 per cent Y-o-Y).

 

Zinc has also benefited from LME price trends (prior to this week’s correction) and zinc operating profit was ₹6,100 crore, up 35 per cent Y-o-Y (36 per cent Q-o-Q). Zinc CoP (ex-royalty) is down 10 per cent Y-o-Y. Iron ore saw adverse trends with ore sales volumes down. Consequently, operating profit was down 24 per cent Y-o-Y. In power, its acquisitions Athena will achieve higher plant load factors while Meenakshi Energy will also scale up.