Zinc, aluminium drive up Vedanta's Q2 topline

Profitability was lower than expectations due to higher fuel costs

Vedanta's performance for the quarter ending June 2017 was driven by strong show by zinc and aluminium segments. Higher zinc-lead and silver volumes at Hindustan Zinc (mined metal production up 84 per cent year-on-year) and rising aluminium production (reaching 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 Bloomberg consensus estimates of Rs 18,237 crore.

On sequential basis, sales were likely to be soft due to some correction in base metal prices, sequential decline in volumes in Zinc India (as per mine plan) business, lower copper volumes, decline in iron-ore prices as well as production, currency appreciation and fire at Talwandi Saboo power plant (TSPL). Zinc and lead prices on the London Metal Exchange (LME) had corrected by 5-7 per cent sequentially. Even though aluminum prices were up three per cent sequentially, the cost of production was expected to be higher led by rising coal costs. Nevertheless, at the operating level the impact was more profound.

Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 4,965 crore (up 40 per cent year-on-year, but down 32 per cent sequentially) came six per cent lower than consensus estimates of Rs 5,279 crore. Coal costs could be one reason for the miss as company indicated that temporary disruptions in domestic coal supply during Q1 led to increase in power costs, and also due to pot outage (production constraints) at Jharsiguda smelter.

Finance costs during the quarter also increased due to higher temporary borrowing at Zinc India, capitalisation of new aluminium and power capacities, and interest on preference shares, partially offset by lower interest rates. Other income at Rs 1,055 crore, too, came lower by Rs 216 crore due to lower investment corpus at Zinc India post record dividend payout and lower mark-to-market gains.

With all this, net profit at Rs 1,525 crore also came lower than consensus estimates of Rs 1,568 crore.

However, overall, it still remains a good performance and strong turnaround in profitability for the company during last one year, led by rising volumes and rebound in base metal prices. The reported net profit in Q1 is double the Rs 754 crore figure in the year-ago quarter. 

Despite the miss on profitability front, Vedanta's stock price closed at Rs 274.40, a gain of 3.66 per cent over Monday'sclosing price.

The company's outlook remains firm as base metal prices are rebounding. Zinc per tonne prices on the LME, which had corrected from highs of $2,970 in February to $2,434 levels in June, have rebounded to $2,774 levels now, and are expected to remain firm looking at supply tightness. Lead prices per tonne, which declined from $2,441 levels in February to $2,035 levels in June, have rebounded to $2,220 levels now. Aluminium continues trading firm and average aluminum premiums (price above benchmark LME prices) increased to $128 per tonne in June quarter from $95 per tonne in March quarter. Copper Tc/Rc’s (margins) though remained lower at 20.8 cents/pound, said the company.

Capacity expansion at Hindustan Zinc is on track to achieve 1.2 mtpa by FY2020 and FY18 is to see integrated zinc-lead production at 950,000 tonnes with silver crossing 500 tonnes mark. Zinc International business is also to see production of about 160,000 tonnes in FY18 with Gamsberg project commencing production from mid-FY18. Ramp-up at 1.25 mtpa Jharsuguda-II smelter is on and 325,000 tonnes BALCO-II is fully operational and was capitalised in June quarter. Aluminium production is to reach 1.5 mtpa to 1.6 mtpa (excluding trial runs) and so is alumina production thereby meeting half of overall requirements. The company is working towards securing bauxite mines in Orissa.

With better free cash flows, debt is to reduce further and with completion of Cairn merger, Vedanta can utilise cash of Rs 27,646 crore to fuel expansions or reduce debt further. Overall prospects remain strong, and analysts at Motilal Oswal Securities and Edelweiss Securities prior to results had given target prices of Rs 301 and Rs 310 respectively, indicating about 10 per cent upside potential from current levels.