BackSesa Sterlite’s Q2 results get a metal cushion
The company's metals business did all right, despite rising coal costs, due to higher volumes and steady realizations
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A bearish outlook is prevailing for commodities due to predictions of slowing global economic growth, especially in China. Indeed, commodity conglomerate Sesa Sterlite Ltd’s oil and gas business, residing in subsidiary Cairn India Ltd, is facing a difficult period due to falling crude prices, made worse by a decline in output.
But Sesa Sterlite’s metals business did all right during the September quarter, despite rising coal costs, due to a combination of higher volumes and steady realizations. On a sequential basis, the company’s consolidated revenue rose by 14.1% and its operating profit margin declined by 33 basis points. The main reason for this decline was a sharp jump in material and energy costs. And the business that takes maximum blame for the decline is crude oil.
Among metals, copper was a star performer as output recovered after a planned shutdown affected output in the June quarter. It was also helped along by a 10.6% sequential increase in treatment and refining charges (Tc/Rc), the main income for custom smelters such as Sesa Sterlite. The company said its operating efficiency too improved, resulting in lower per-tonne costs. The net result was an increase in its earnings before interest, taxes, depreciation and amortization (Ebitda) to ₹ 466 crore, from ₹ 90 crore in the preceding quarter. The outlook for the rest of the year remains good, with Tc/Rc charges expected to remain firm.
In its zinc business, the domestic business saw output improve, which helped lower the unit production cost. Zinc prices too improved, bucking the trend seen in other non-ferrous metals such as copper. But Sesa Sterlite’s international zinc output declined, though margins improved. And in aluminium, output growth and better realizations due to higher regional metal premiums contributed to better profitability for its Vedanta aluminium business. But bauxite availability, coal availability and cost continue to be a drag. Now, the iron ore business is seeing some pick-up in sales, but the real momentum will come when its Goa operations ramp up. The power division’s profitability was hurt due to higher coal costs.
Sesa Sterlite’s metals business is expected to see steady trends in output in the near term, as it ramps up production at its mines. The ability to get over its sourcing constraints for coal and bauxite should be triggers to watch for, as they can help bolster both power and metal output and lower costs. While iron ore prices have fallen sharply in 2014, the risk to be alert for is if non-ferrous metals—that have held up relatively well so far—follow suit. On Wednesday, the company’s shares rose by 2.1%, while the broad market rose by 0.8%.
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