BackVedanta aims to utilize assets better in tough environment
The challenge for Vedanta is to remain profitable in these tough times, as incremental production may well not be viable at times
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The sharp fall in crude oil prices and the resultant erosion in Cairn India Ltd’s profits were expected to drag down the performance of Vedanta Ltd, which owns close to 20% of the oil company. But hardly anyone expected Vedanta, formerly known as Sesa Sterlite Ltd, to write off the majority of its investment in Cairn India.
Vedanta wrote off over ₹ 19,000 crore against its acquisition goodwill account, which has resulted in a loss of ₹ 19,228 crore. The write-off, according to the company, was necessitated by the sharp fall in crude oil prices, which lowered the value of its oil and gas assets. It also took an impairment charge on overseas copper mines.
Excluding these “exceptional items" the net profit for the last quarter is ₹ 491 crore. But even this is lower than the consensus Bloomberg brokers’ estimate of around ₹ 590 crore.
Vedanta’s businesses were impacted by the slump in commodity prices. Revenue is down 7% from the December quarter. But Ebitda (earnings before interest, taxes, depreciation and amortization), or operating profit, fell at a sharper pace of 36% as realizations fell across the businesses—energy, zinc, copper and aluminium.
From 43% in December, Ebitda margin dropped to 28% last quarter. Of the 15 percentage points drop, 10 percentage points were due to low realizations. Apart from low commodity prices, margins were also impacted by the rise in provisions for royalties.
Vedanta shares have fallen by about a third since early July, or since the time crude oil prices started to correct. While the March quarter performance is likely to make investors even more jittery, Vedanta is hoping to start off the new fiscal (2015-16) on a better note.
Reacting to the slump in commodity prices, the company has drastically reduced its capital expenditure. It plans to focus on commercialization of the assets in which it has already invested, and the aluminium capacity, rather than on fresh investments.
In the process, it aims to conserve cash and bring down debt. From ₹ 80,566 crore in March 2014, Vedanta’s consolidated debt reduced 3.5% to ₹ 77,752 crore last quarter. This was made possible by the retirement of loans from cash balances. As a result, finance costs fell 7% in last fiscal. If commodity prices do not turn for worse from here, the management believes it can further bring down the debt in the current fiscal year.
While the commodity prices trajectory is anybody’s guess, the challenge for Vedanta is to remain profitable in these tough times, as incremental production may well not be viable at times. It hopes to benefit from the falling supply outlook for zinc (one large production facility going off the market). But in other businesses like iron ore, where it plans to ramp up production in Goa in the later part of the year, low international prices can be a major hindrance. “At spot global iron ore prices and high export duty, mining in Goa is not viable," Motilal Oswal Securities Ltd said in a note released last month.
The writer doesn’t own shares in the above-mentioned companies.
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