Local woes set to hit Vedanta earnings

Closure of copper business to hurt profits; oil & gas and aluminium verticals may help offset some pain

The going is likely to be tough for Anil Agarwal-led Vedanta Ltd. With some of its domestic businesses in standalone operations shutting down, Vedanta’s earnings are expected to take a hit in the near term.

Last month, the Madras High Court ordered the permanent shutdown of Sterlite Industries’ copper smelter in Thoothukudi, after 13 people were killed in police firing on local residents, who were demanding the closure of the company’s 400,000 tonnes per annum plant over environmental concerns. In its standalone business, copper accounted for 28 per cent of profit before interest and tax in 2017-18.

Vedanta, once the largest ore miners in Goa, has almost no operations now, after a Supreme Court order in February quashed the renewal of 88 mining leases and directed companies to stop operations after March 15, 2018. The order has brought Goa’s iron ore mining to a halt. Iron ore accounted for about 8.4 per cent of Vedanta’s standalone profits in 2017-18.

In September last year, the Chhattisgarh Environment Control Board served a notice to Bharat Aluminium Company Ltd, a subsidiary of Vedanta, to close its 1,200MW power plant for allegedly violating green norms.

“Our earnings estimates are surely going to be slashed for the coming quarter due to the Sterlite development; the Goa iron ore issue has already been factored in by the market,” said a Mumbai-based analyst.

Vedanta’s standalone operations comprise iron ore, copper, aluminium, power, and oil and gas. The standalone copper and iron ore operations form much of the numbers for the two divisions at the consolidated level, while the standalone aluminium operations account for 67-72 per cent of the consolidated aluminium numbers.

In last three years, Vedanta’s oil and gas operations through Cairn India (now merged with the company) and aluminium business are the only two verticals to have shown consistent growth in standalone profits. The two accounted for 65 per cent of standalone profit in 2017-18, up from 31 per cent in the previous year. Profits of the copper and power businesses have been on a decline in the past three years, while that of iron ore has been volatile. Some brokerages are of the view that though earnings may dip in the near term, the phase is likely tobe short-lived since the positive outlook for the company's oil and gas and aluminium verticals should save the day for the entity.

Vedanta has provided a higher guidance for oil production at 220,000250,000 barrel per day (bpd), against 195,000 bpd in 2017-18. Moreover, with prices of crude oil moving upward and projections for oil prices also rising, earnings from this vertical are expected to strengthen further. “Though the Goa mines are shut, some contribution from the Karnataka mines (where the state has raised the mining cap to 35 million tonnes from 30 million tonnes) should bring some volume for the company’s iron ore business.

Also, the aluminium volume guidance being strong for 2018-19, it should lend support to standalone earnings,” according to Giriraj Daga, portfolio manager at Visaria Securities. The firm has two aluminium smelters with a combined capacity of 1.75 million tonnes in Jharsuguda. Having being awarded two mines in Odisha, Vedanta will get 15 million tonnes of bauxite reserves, which is likely to take care of 75 per cent of its needs.

On a consolidated basis, Vedanta includes operations of cash-cow Hindustan Zinc and Zinc International businesses, both of which have been showing strong performance. Vedanta has been getting hefty dividends from Hindustan Zinc in the last couple of years, which is expected to continue, said analysts. The good part is that the standalone business accounted for just 21 per cent of the company’s consolidated profits in 2017-18.

If prospects of oil and gas, aluminium and zinc (these three account for 87 per cent of Vedanta’s consolidated profits) improve on expected lines, the firm should overcome some of the woes in its India businesses, and cushion the impact at the consolidated level.