Seen from the revenue side, Vedanta Ltd’s September quarter (Q2) results suggest that it is in a good place mostly, but on the cost front some pressures are showing, even if they may be short-term in nature.

Rising commodity prices are overshadowing other problems for metal producers, thanks to China holding on to its stance of cutting back on polluting metal capacity. Improving economic conditions in the developed world and China’s continuing economic growth is lending support to an improving demand outlook. The tight supply situation has lent support to non-ferrous metal prices. The firming up of crude oil prices is another factor that goes in Vedanta’s favour. A strong rupee is a negative factor though.

Thus, higher realizations contributed to four-fifths of the increase in sequential Ebitda (earnings before interest, tax, depreciation and amortization) in the September quarter. But higher costs chipped away, as its metals businesses saw higher input cost inflation. Also, low coal linkage availability during the quarter meant higher procurement costs and also one-off costs at its aluminium business. The company’s ability to get bauxite allocation in Odisha is also critical to improving profitability of the aluminium business.

Now, Ebitda did increase by 16.3% sequentially which by itself is certainly good, but Ebitda margin slipped by 40 basis points. While one-off costs won’t recur sequentially, the domestic coal shortage could improve but when it will is not certain, and so coal costs may continue to pinch for a while. Another factor that should aid margins is a ramp-up in output across business lines in the second half.

Even with the sequential margin decline, Vedanta’s consolidated Ebitda margin is at a healthy 26.3%, and its business is throwing up cash. Its net debt-to-equity ratio is down to 0.6 times compared to 0.8 times as of the preceding quarter. Even as it has ample cash, the company has revised its fiscal year 2018 capital expenditure guidance down by $100 million to $1.1 billion.

That raises the question of what next for Vedanta. While the management did seem pleased at having a low net debt to Ebitda among peers, it can go even lower if it uses cash flows to reduce debt in future. But that would not be the only priority for the company.

Vedanta’s improving balance-sheet profile will also mean it will develop an appetite for the next big move, which could be a major expansion plan or a big acquisition. The only stumbling block there will be not having direct access to Hindustan Zinc Ltd’s cash flows, since it’s a listed subsidiary in which the government retains a significant stake.