The next important contributor for Vedanta
remains its Zinc India operations (including lead and silver production) represented by Hindustan Zinc, which contributes about a fifth to overall revenues. Zinc prices on the LME too remain subdued, down from $3,000 a tonne in May 2019 to around $2,300 a tonne now. The impact was visible in the September quarter with the segment’s profits down 18 per cent year-on-year. Analysts say that while the global zinc production deficit is likely to continue, inventories currently remain high and are putting pressure on prices. Also, the recovery in zinc will depend on the uptick in steel demand as the metal is predominantly used in making steel. Analysts at Prabhudas Lilladher say they don’t see zinc prices sustaining above $2,550 a tonne due to weaker demand and pick-up in supplies. Even as Hindustan Zinc remains committed to raising zinc output, there are temporary hiccups due to a fall in ore grades and geo-technical issues at its SK mine. Hence, Hindustan Zinc’s management had lowered guidance for mined metal/silver production by 5 per cent and 13-19 per cent for FY20, respectively.
For Vedanta, the copper segment already remains under pressure with continuing production disruption at its Tuticorin plant.
Among the few bright spots is Vedanta’s oil and gas division (earlier Cairn India), which contributes as much as copper (14-15 per cent of revenues) and continues to do well. However, crude oil prices remain range-bound and the segment’s volumes are not expected to see significant upside in FY20, which is likely to keep investors’ sentiment soft for now.
Overall, analysts say that despite its robust balance sheet with FY20 estimated debt-equity ratio at 0.9, they see challenges for Vedanta
on the operating front as volume guidance for its key business segments has been lowered while costs remain high. Those at Motilal Oswal Securities had already cut their FY20 and FY21 EBITDA estimate by 10 per cent and 9 per cent, respectively, on the back of higher costs for the aluminium business. While the company expects the cost of production in aluminium business to reduce through higher captive bauxite and coal linkages, coal availability issues may weigh on costs over the near term, say analysts.