Vedanta stock slips over dip in commodity prices despite in-line Q2 show

Soft prices of commodities including metals is weighing on investor sentiment

Metals and mining resources player Vedanta declared results that were more or less in line with expectations. However, given the fall in commodity prices the results were considered disappointing by most investors and the stock was sold down.

The consolidated net sales stood at Rs 36,600 crore (YoY up 21 per cent but down 5 per cent QoQ). This was due to higher sales volume, as well hedging gains, and foreign exchange gains, despite lower commodity prices. The consolidated EBITDA was Rs 7,700 crore, down 26 per cent YoY and down 24 per cent QoQ. Aluminium was the worst performer in the portfolio. Oil and Gas compensated to some extent, delivering EBITDA of Rs 2,000 crore.

The adjusted PAT of Rs 1,600 crore was down 66 per cent YoY and down 64 per cent QoQ. The company had to absorb higher finance costs, depreciation at Zinc India, and higher depletion charges in the Oil & Gas vertical. The finance cost was up 36 per cent QoQ with higher net debt on the balance sheet.

One concern was that LME prices continued to move down both on QoQ as well as on YoY basis. Copper, aluminium, zinc, nickel and alumina were down 2 per cent, 3 per cent, 9 per cent, 3 per cent and 5 per cent on a QoQ basis. Lead was the only exception to the downtrend, being up 2 per cent QoQ on LME. The company had hedges of 28 per cent of production of zinc, 34 per cent of aluminium, and 33 per cent oil and unwound these hedges, with total hedging gains at Rs 1,700 crore.

On a QoQ basis, sales volumes of lead, silver, aluminium rose, while zinc volumes were down. The coal linkage for the aluminium segment rose to 55 per cent of requirements, after declining to 22 per cent in Q1, 2022-23. However, while coal prices were reduced as a result of better linkages, (compared to auction coal), the transportation costs were high.

The net debt increased by Rs 5,300 crore to Rs 32,100 crore from Rs 25,800 crore (Q1-end).  In the first half of 2022-23, the net debt has increased by Rs 11,100 crore.

Management guidance indicated that coal costs are likely to reduce substantially as the company increases captive production. Over the next 4-5 years, Vedanta expects to meet 100 per cent of thermal coal demand through internal resources. The Oil & Gas segment performance is linked to Brent movements but the fields are declining which means higher costs and struggles to maintain production. The share of EBITDA from the aluminium business is likely to rise going forward although operating margins for alumina smelters has dropped 1,200 basis points this year.

Vedanta has scaled back its FY 2023 guidance by 20 per cent and it has trimmed the capital expenditure (capex) plans for the aluminium and power division, while it kept the capex guidance steady for divisions such as oil & gas, and zinc, among others.

Vedanta shares have lost 7.15 per cent in the last 12 months, with a fall of 17 per cent in calendar 2022. Valuations for a company with such a wide range of divisions is difficult. But at the current Rs 281, the share price is considerably above at least one analyst’s sum-of-the-parts valuation of Rs 255. Hence, there could be a downside.