Zinc, aluminium boost Vedanta's Q1 numbers

Capacity expansion, firm pricing outlook to drive growth despite rising fuel costs

Mining conglomerate Vedanta’s June quarter (Q1) performance was largely driven by a strong show of the zinc and aluminium segments.

Higher zinc-lead and silver volumes at Hindustan Zinc (production up 84 per cent year-on-year) and rising aluminium output (run-rate of 1.4 million tonnes per annum or mtpa), led by capacity expansions, drove up revenues. At Rs 18,203 crore, sales grew 27 per cent year-on-year, meeting the Bloomberg’s consensus estimates of Rs18,237 crore.

However, sequentially, the performance was expected to be soft due to a correction in base metal prices, sequential decline in volumes at Zinc India (according to mine plan), lower copper volumes, a decline in iron ore prices as well as production and currency appreciation, besides a fire which broke out at the Talwandi Sabo power plant in Punjab.

Prices of zinc and lead on the London Metal Exchange (LME) had corrected five to seven per cent sequentially. Though aluminium prices were up three per cent sequentially, cost of production was expected to be higher due to rising coal costs. Temporary disruptions in domestic coal supply in Q1 led to higher power costs. Also, a pot outage incident (production constraint) at Jharsuguda smelter unit affected operations. Earnings before interest, tax, depreciation and amortisation (Ebitda) stood at Rs 4,965 crore, up 40 per cent year-on-year, but down 32 per cent sequentially — six per cent lower than the consensus estimates of Rs 5,279 crore. 
 

Finance costs increased due to higher temporary borrowings at Zinc India, capitalisation of new aluminium and power capacities, and interest on preference shares, partially offset by lower interest rates. Other income declined Rs 216 crore at Rs 1,055 crore due to a lower investment corpus at Zinc India after a record dividend payout and lower mark-to-market gains.

Net profit at Rs 1,525 crore was also lower than the consensus estimates of Rs 1,568 crore. However, it remains a good performance and a strong turnaround in profitability during the past one year. Net profit was Rs 754 crore in the corresponding three months a year ago. 

Despite the miss on profitability, the stock has gained nearly six per cent in two days and touched a 33-month high of Rs 282.95 on Wednesday.

A key reason is that Vedanta’s outlook remains firm as base metal prices are rebounding. LME Zinc, which fell from a high of $2,970 in February to $2,434 levels in June, is now at $2,774. The outlook remains firm looking at the supply tightness. While copper margins are lower at 20.8 cents/pound, oil and gas has seen a better performance, led by rising crude oil prices.

Capacity expansion in key businesses, especially zinc, and an increase in volumes of zinc-lead, silver and aluminium, among others, are expected to drive Vedanta’s top line, aided by firm prices.

Analysts at Edelweiss believe a capacity ramp-up at the aluminium and zinc divisions should see a free cash flow of Rs 10,000-12,000 each in FY18 and FY19. This coupled with the Cairn merger should help lower debt or expand capacities (to the extent of Rs 27,646 crore). Most analysts have set target prices upwards of Rs 310-320.