Vedanta's earnings disappointment a blip, analysts see better days ahead

The September quarter results at Vedanta, the natural resources major, had disappointed the market. Yet, its share price closed with a gain of 0.8 per cent on Thursday -- the results were declared on Wednesday after market hours.

One reason could also be that the stock had corrected sharply from its January high of Rs 350 to Rs 210. Analysts say that with the high dividend payout (Rs 17 a share) and with the outlook improving, there could be more gains ahead.

Even as revenues were supported by the aluminium and oil & gas businesses, lower zinc volumes and high production costs in both zinc and aluminium took a toll on profit, which fell 46 per cent year-on-year.

Zinc India, represented by listed subsidiary Hindustan Zinc, contributed a fifth to the consolidated numbers. Last week, it had reported lower revenue and profit on the back of softer prices and output. A rise in Zinc International's cost of production proved a further drag. 

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Aluminium (a third of consolidated financials) saw good revenue growth, led by record quarterly production of 494,000 tonnes, up 23 per cent over a year. Aluminium prices on the London Metal Exchange (LME), though volatile, were still up two per cent year-on-year (but down nine per cent sequentially) to $2,058 a tonne. Premiums (over benchmark LME metal prices) were eight per cent higher. Hence, the segment's revenue grew 51 per cent year-on-year and 6.6 per cent sequentially.

The oil and gas segment (a sixth of revenue) helped on the back of rising crude oil prices. The segment saw 65 per cent year-on-year growth in revenue.

Cost pressure 

Rising input costs, including alumina (to produce aluminium) and coal (for power) led to pressure on profit. With the cost of production surging, it impacted the aluminium segment's profit, down almost 70 per cent year-on-year in the quarter. This, coupled with Zinc India profit declining almost a third, meant the consolidated operating performance was bound to decline, offsetting the more than doubling of profit in the oil and gas segment. 

 

The road ahead  

As mentioned, after the results' disappointment, the announcement of a high dividend payout supported the stock. Importantly, analysts are also confident of the outlook.

On reducing the cost of production in the aluminium business, the management highlighted the increased focus on fast-tracking its Lanjigarh (Odisha) alumina refinery from the current 1.4 million tonnes (mt) to 4 mt (2 mt by end-March), as it is confident of securing supplies of bauxite, a key input. Alumina production from Lanjigarh at 348,000 tonnes was up 30 per cent year-on-year. Analysts at Kotak Institutional Equities also say it is unlikely that the alumina price index can sustain at record historical highs for long. 

 

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The company plans to also increase its coal security from 49 per cent (of existing requirement) in the quarter to more than 90 per cent over the medium term through 3.2 mt of additional linkage from the Tranche-IV auction. It is also eyeing the later Tranche-V and Tranche-VI ones.

On the cost front, while the company is targeting a per tonne production cost of $1,500 over the next one to two years, from $2,018 in this quarter, analysts estimate it could be $1,950 for FY19.

The zinc segment is also expected to see a better second half. The September quarter cost at Zinc India was impacted by lower production and higher price of crude oil derivatives/coal but the company has reiterated that coal costs have peaked out. As they are also expecting more linkages, the ramp-up at Rampur Agucha mines will further reduce costs.

 

For Zinc International, trial production has commenced at Gamsberg (Namibia) and commercial production would commence by the end of November (estimate of 75,000 tonnes in FY19). Gamsberg would reach full capacity of 250,000 tonnes annually by FY20. 

The outlook for the oil and gas segment remains strong, looking at firm crude prices. Analysts at Edelweiss envisage better days ahead for Vedanta on the twin planks of operating leverage and cost efficiencies. A sustained high dividend yield and balance sheet strength are sweeteners. Kotak, though, has cut its operating earnings estimate by two to six per cent for FY19, FY20 and FY21. It maintains a 'buy' rating on the stock due to inexpensive valuations of four times the enterprise value to operating profit, based on its FY20 estimates.   



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