Vedanta beats Q3 estimates on higher volumes

Firm base metal outlook, rebounding crude oil prices to drive earnings

Natural resources major Vedanta again reported a good quarter, helped by firm base metal prices and rebound in crude oil prices. The December quarter (Q3) performance was also aided by growth in the aluminium, zinc, power, and oil & gas segments. Even as iron ore and copper performances remained soft, and currency appreciation partially offset the benefits, Vedanta’s net sales at ~243.6 billion — up 19 per cent year-on-year (y-o-y) and 13 per cent sequentially — was better than the Bloomberg-consensus estimate of ~236 billion.

Earnings before interest, tax, depreciation, and amortisation (Ebitda) at ~67.8 billion, too, improved 13 per cent y-o-y and 17 per cent sequentially — better than the estimates of ~66.28 billion. The impact of rising coal prices was evident, as power and fuel costs increased by a sharp 44 per cent y-o-y, pulling down operating margins to 35 per cent, against 39 per cent in the year-ago period. Sequentially, however, the number remained stable despite the 12 per cent rise in fuel costs and higher material expenses. Overall, the beat was aided by a strong improvement in profitability in the power and oil & gas segments, and the Zinc International business.

The one-off charge of ~1.58 billion paid towards arbitration, pertaining to a historical vendor claim in the aluminium business, impacted net profit. Other income, too, was down 44 per cent y-o-y, with investment corpus coming down after special dividend payout by Hindustan Zinc. The reported net profit at ~20.53 billion thus missed the consensus estimate of ~24.98 billion.

The company’s prospects remain strong on the back of strengthening metal and crude oil prices, and capacity expansions. Average aluminium, zinc, and copper prices on the London Metal Exchange were up 23-29 per cent y-o-y in Q3, and 4-9 per cent higher sequentially.

On the other hand, the aluminium segment (a fourth of top line) continues to be benefitted from regular ramp-up in production; in Q3, output was up 40 per cent y-o-y and 11 per cent sequentially. Though the rising alumina prices (up 34 per cent sequentially) did impact the segment, with energy costs rising and profitability down 17.4 per cent y-o-y, the improvement on a sequential basis is positive.

Hindustan Zinc, the second-largest contributor to Vedanta’s numbers, too, is seeing regular increase in output and profitability. Notably, rising output in its Zinc International business is also driving growth. Zinc International’s profits grew a strong 250 per cent y-o-y. Similarly, record plant availability of 97 per cent for the Talwandi Sabo Power unit not only drove the segment’s revenues, but also boosted profitability by 46 per cent.

Though the oil & gas segment contributes only about 10 per cent to the revenues, the rebound in crude prices is driving profitability; profits improved 232 per cent y-o-y and 21 per cent sequentially.

With overall profitability improving, deleveraging continues, which also meant that finance costs were down 13 per cent y-o-y and 8 per cent sequentially. Vedanta said it was looking forward to a strong Q4 that would help finish the year with healthy cash generation.