Vedanta today posted a steep 98.9 per cent fall in its consolidated net profit at Rs 17.91 crore for the December quarter as the metals major battled a subdued commodities market, which saw prices hit over 10-year lows.
The firm led by NRI billionaire Anil Agarwal had reported a net profit of Rs 1,587.50 crore in the year-ago period.
The record decline in crude and metal prices impacted the mining and metal conglomerate's total income, which fell 22.6 per cent to Rs 14, 876.55 crore in October-December of 2015-16, from Rs 19,218.90 crore during the same quarter in 2014-15.
However, markets cheered its cost optimisation efforts, which helped Vedanta post an unexpected profit at a time when metals and oil companies globally have seen their sales and profits dry up due to high production and subdued demand.
Vedanta stock rose 5.64 per cent to close at Rs 67.40 on NSE while they settled at Rs 67.25 on BSE, up 5.34 per cent from their previous closing.
Analysts attributed the better-than-expected performance to its cost reduction drive in the wake of price crashes in the metals and crude market amid a subdued demand.
Vedanta CEO Tom Albanese said the commodities market is passing through "very challenging times" with a steep drop of 60 per cent in crude prices, 40 per cent in iron ore, 28 per cent in zinc, 21 per cent in copper, 18 per cent in silver as well as aluminium and 8 per cent in lead.
"Under such conditions, we did well. The cost reduction programme gained momentum and I believe that this relentless focus on efficiency will not only make our business more resilient through the cycle, but position us favourably for any future improvement in market conditions," he told PTI.
Vedanta's total expenses fell 12 per cent to Rs 13,541.18 crore, from Rs 15,400.27 crore during the reported quarter.
On price crash, he said: "What we are seeing is that in many commodities the prices are as low as during the financial crisis in 2008-09 and in many, it is as low as before the boom in China. We are seeing conditions last experienced around the Asian financial crisis in the late 1990s."
On the outlook for the March quarter this fiscal, he said: "I think in an environment where the market continues to stay weak for the next quarter, we are continuing, and in some cases, will intensify our cost reduction efforts."
The metals-to-oil group said it is actively managing balancesheet, with a focus on optimising opex and capex to maximise free cash flow, refinancing and terming out maturing debt and simplifying the group structure.
"Our financial position remains robust with cash and liquid investments of Rs 50,685 crore, which is invested in debt-related mutual funds, bank deposits and bonds and undrawn committed facilities of about Rs 4,800 crore as on December 31, 2015," it added.
Gross debt and net debt came in at Rs 80,952 crore and Rs 30,267 crore, respectively, as of December 2015, higher than Rs 79,433 crore and Rs 27,105 crore as of September 2015.
Albanese said: "We have to be prepared for a period of
sustained market weakness. So you can see the focus on opex, capex and of course, free cash flow."
On cost rationalisation, he said the firm's businesses are focused on what needs to be done for the future.
"I think it is important to recognise that with every single item of spend, we have to look at them doubly hard. We have to look at the number of people in the workforce. From time to time, we have to make some difficult, but realistic decision about how many people we need," he added.
On the outlook for the market, he said most metal prices have dropped to a point where a quarter of the world's producers are losing money.
"Then you begin to see supply disruptions and you begin to see that it equalises inventories. When inventories begin to drop, prices begin to recover. So we better watch very carefully the supply-demand situation on a metal to metal basis," he added.
Right now, inventories in zinc are dropping and that is "very encouraging", he said, adding the worse for the metal is almost over and the coming months will be "more optimistic".
On copper, he said the prices did not drop that much, but some new mines are coming in the market, but there is also the issue of global copper supply beginning to fall in some areas.
"So I think the market has been expecting large copper surpluses in calender year 2016. But revised numbers for surpluses are a bit small, maybe in deficit. So copper could turn during the course of this year," he added.
On aluminium, he said about half of the world's capacity is losing cash flow. The demand for the metal is "very strong", but there has been large increases in production, particularly in China over the past three years.
There is pressure on Indian producers as China is exporting its aluminium products to the country, he added.
On oil, he said there could be a period of extended weakness in crude prices.
"In oil, I'd say half of the oil producers are losing cash flow in this market. But we also see anticipation of Iran coming in the market. There is also an increase in the floating stocks. So, we could see a period of extended weakness in oil and it is probably more related to geo-political events than to supply-demand issues.
"I don't think oil prices will be down for ever. They could be down here for a couple more months. The turnaround in oil and metal prices is just around the corner," he added.
On Vedanta-Cairn merger, he said the shareholders and creditors meetings are expected to be convened in the current quarter (January-March). The company continues to work towards completion of the merger by April-June 2016.
Vedanta said during the quarter, rupee depreciation led to a forex gain of Rs 136 crore on dollar-denominated investments, advances and trade debtors.
On the outlook on aluminum business, Albanese said: "We
see more and more aluminum being produced at China...When that material is exported from China its dampens the overall aluminum market and particularly dampens aluminum premium. That has had a negative effect on our business."
"For our purposes in this current market environment we will continue to ramp up our own smelter potlines," he said.
He further said that the rising capacity of the aluminum production in China is one of the challenges in the sector that will keep the market under stress for the next few years.
On the ongoing mines auctions in India, Albanese said that many of the leases that are being auctioned are very small.
"I use the term postage stamp and if lease is too small in size its generally not capable of having a large operation, he said, adding that there have been cases "were we chose not to bid because the lease were postage stamp size".
