Subdued commodity prices take a toll on Vedanta; stock hits 52-week lows

While oil & gas and zinc segments may provide some cushion to earnings, declining base metal prices will keep sentiment subdued

Shares of Vedanta, which have been on a downward trajectory since September last year, hit 52-week lows on Monday. While weak base metal prices hurt by trade war remain a worry, fragile broader equity indices too have contributed to the stock downslide. The June quarter performance, announced a few days, back did not encourage either with net profit down 12 per cent on a four per cent fall in revenues. 

For the producer of base metals, Vedanta’s aluminium segment has disappointed due to pressure on realisations, offsetting the better performance of oil and gas segment and Zinc India. However, unwinding of structural investments in Volcan Investments (parent of Vedanta) came in as a positive. Post profit earnings on investment, the transaction is expected to complete this month. While this should take away one major concern, the management has also dismissed any further investments in such related-party transactions.

On the business front, caution on base metal prices however continues. Prices of aluminium, zinc, copper, etc continue to slide on global trade war concerns. Zinc prices though may get some support as global zinc inventories remain low, say analysts. Vedanta’s zinc segment is also expected to see volume growth with rising volumes at Hindustan Zinc (a listed subsidiary) in India and also Zinc International. Vedanta expects its Gamsberg mine (South Africa) to produce 180,000-200,000 tonnes in FY20 and exit Q4’FY20 with a run-rate of 250,000 tonnes. Its FY20 production target from Black Mountain (South Africa) and Skorpion (Namibia) mines is 170,000 tonnes. And, Hindustan Zinc is expected to exit FY20 at a run-rate of 1.2 million tonnes per annum (mtpa), compared to about 1.0 mtpa at FY19-end. 

In oil & gas, Vedanta expects to reach production of 260,000-270,000 barrels of oil equivalent per day (boepd) by the end of FY20 after reaching an exit run-rate of 200,000 boepd in Q2’FY20.

Analysts at Phillip Capital say that zinc and oil & gas businesses are expected to report robust volumes growth in the next couple of years and would continue to contribute about 80 per cent of Vedanta’s EBITDA (operating profit). Those at Motilal Oswal have raised their valuation multiples for oil and gas business (to 2.5x v/s 1.25x earlier) and Zinc International (5x v/s 3.25x) on unwinding of related party exposure. Comparatively, lower debt levels and expectation of dividend yield of 5-6 per cent are also positive.

However, given the overall weak outlook for base metals, investors could wait for a reversal in sentiment.