Vedanta results: Volatility in base metal prices can weigh on profitability

Vedanta's June quarter (Q1) show may look disappointing, with net profit falling short of expectations and key businesses putting up a weak show. But the shortfall was owing to a sharp fall in other income and surge in taxes.

As expected, one of its key businesses, zinc along with others such as iron, together with the closure of its Tuticorin copper smelter, weighed on its performance and affected consolidated numbers. In fact, they also partly offset gains in aluminium and oil & gas segments, which saw a rise in both volumes and realisations. 

Average aluminium prices on the London Metal Exchange (LME) were up 18 per cent year-on-year, which along with rising volumes, saw the segment's revenues (about fifth of overall) grow 63 per cent and profits up by four-fold. With oil prices ruling firm, the segment (28 per cent of topline) saw revenues rise 42 per cent, and profits by 45 per cent. Thus, Vedanta's consolidated revenues grew 15 per cent year-on-year to Rs 222 billion, ahead of estimates of Rs 203.79 billion, and operating profit by 31 per cent year-on-year.

Rising fuel costs and lower contribution of zinc segment did take a toll as margins, at 34 per cent, came lower than 36 per cent in the year-ago quarter. However, the 62 per cent year-on-year fall in other income (on lower investment corpus after dividend pay-out and mark-to-market impact on investments) along with 65 per cent jump in taxes (at Rs 11.12 billion) affected profits. Net profit at Rs 15.33 billion, up a per cent, thus missed Bloomberg estimate of Rs 22.2 billion.

The Zinc India business may have remained soft, affected by lower production (closure of open cast mines) and higher costs, but is expected to recover. In Vedanta Zinc International business, new mines, earlier under development, will drive its growth (Gamsberg production to commence in September). Zinc (43 per cent of topline) remains the most important segment.

Likewise, prospects of oil & gas segment, and aluminium volumes, too, will benefit. Kuldip Kaura CEO Vedanta said the company was currently ramping up production across all businesses. Vedanta is also working on reducing costs in aluminium segment (down $50 per tonne in Q1, over FY18) and increasing alumina production.  

However, volatility in base metal prices could pose a challenge. LME aluminium and zinc prices are down about 20 per cent since March'18. These may keep a tab on sentiment even as most analysts remain positive on the stock.

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