Vedanta’s margins dive sequentially on lower output and prices
A decline in Vedanta Ltd’s Ebitda (earnings before interest, taxes, depreciation and amortization), on a sequential basis, was very much on the cards but the extent was more than the Street had anticipated.
While that may disappoint, the company has maintained its guidance for volumes and capital expenditure. Though prices may fluctuate, an increase in volumes is what a mining company has to aim for. That will give sales and profits a firm push, since prices are not in its control.
Overall, in the June quarter, Vedanta’s sales declined by 18.7% sequentially, Ebitda fell by 33.7% and its net profit declined by 46.2%. Over a year ago, when metal prices and output was higher, Ebitda was up by 41.6% and net profit by 67.2%.
Vedanta’s zinc business in India is run by Hindustan Zinc Ltd and had seen volumes decline sequentially. This was as per the company’s mining plan. While the March quarter had seen a spurt in volumes, to make up for lower output earlier, the current year is expected to see even production across quarters. The India zinc business alone contributes to 60% of segment profits. Higher output in FY18 should deliver better sales growth and profits, though quarterly numbers will show variations.
The company’s international zinc business saw higher volumes, which led to a sharp increase in segment profits sequentially. In mid-2018, its Gamsberg project is expected to start production, which should contribute to sales gradually, as it ramps up.
The aluminium business was under pressure since part of its capacity was down due to an outage at its Jharsugada (Odisha) smelter. The repair work is on, adding to costs even as production suffered. Production should normalize by the third quarter of FY18. Aluminium output is expected to rise significantly. A second smelter project at Jharsugada will ramp up by the third quarter, and its subsidiary’s aluminium smelting project is already commissioned.
The iron ore business did not do well, even if you discount a seasonally weak quarter in Goa. Vedanta said sales were lower due to low pricing in Goa, while Karnataka saw weak demand at e-auctions. The power business suffered due to a fire that had hit generation, but is now back on line. The company curtailed copper output by advancing a maintenance shutdown, in response to dull market conditions leading to lower treatment and refining fees.
Vedanta’s oil and gas business did well with profit increasing by 69% sequentially, though part of this was due to a recovery of expenses from its partners. Output is expected to step up in FY18 from its oil and gas projects, and progress on this front will be watched over.
One feature across its metal businesses is that input costs have risen due to higher coal and energy costs. This is affecting its margins. The appreciating rupee is another concern, as the landed cost of imports declines and affects its own realizations. Vedanta’s balance-sheet position remains healthy and its projects should deliver volume growth in the next few years. For now, it is back to looking at commodity prices, to see if the going gets better. The US Federal Reserve’s monetary stance and the sincerity of China’s efforts to curb aluminium output are key events to monitor.