Evaluating a conglomerate’s performance is tricky as it is. In the case of Vedanta Ltd, which consists of several commodity businesses, things have become even more complicated for investors lately, thanks to the company’s large investment in a promoter group firm. The stock has lost 21% since January, when Vedanta announced the investment plan.
Despite this dull backdrop, the company’s operating profit for the March quarter increased 6% sequentially and exceeded analysts’ estimates. The earnings beat was driven by higher volumes and reduction in costs. Production cost at the aluminium business dropped 12% sequentially.
Still, the Vedanta stock has lost 7.4% since it announced the March quarter results—more than the 3.7% fall in the Nifty Metal index.
Part of the fall can be attributed to the company’s subdued guidance on production and concerns about earnings growth. Headwinds to the global economy and moderate demand conditions are weighing on metal prices. Aluminium prices on the London Metal Exchange dropped 4.5% last month. The aluminium business generates close to one-third (32%) of Vedanta’s revenues.
Lower-than-expected volume guidance for the zinc, and oil and gas businesses came as a setback as well. “Management’s volume guidance for FY20E was lower than our expectations for the two key growth divisions, i.e., Zinc International and oil division. Guidance of 360,000 tonnes at Zinc International and 210 thousand barrels of oil equivalent per day at oil division in FY20E leads to a 4-5% cut in our estimates," analysts at Kotak Institutional Equities research said in a note.
“A gradual ramp-up at the Gamsberg mine and delays in project awarding at the oil division is leading to slower than anticipated volume growth," they added.
As pointed out earlier, the company’s plan to invest $500 million in Anglo American Plc, which is controlled by a promoter group firm, has led to concerns among investors. Vedanta has paid $270 million, with the balance expected to be paid in the coming quarters. It is a structured investment, wherein Vedanta will only have economic interest with ownership lying with Volcan Investments Ltd, the promoter firm.
The management defended the decision citing downside protection, even as investors have continued to struggle to understand the rationale behind the investment.
According to SBICAP Securities Ltd, Vedanta will receive the money back once the instrument unwinds in two tranches in April and October 2020. Even then, funding an external investment when the company’s own divisions are seeing capital expenditure is difficult to fathom.
“Although this transaction appears at an arm’s length, the counter-party risk is high because the parent drives its value from Vedanta itself and is highly leveraged. Investors are concerned about future capital allocation," Motilal Oswal Securities Ltd said in a note.