Coronavirus adds to Vedanta‘s woes

Outbreak has led to a fall in base metal prices; production ramp-up in oil & gas and zinc biz crucial, say analysts

The Vedanta stock has declined close to 16 per cent since its mid-january highs. While volatility and pressure on commodity prices have hurt investor sentiment, the coronavirus outbreak has aggravated concerns. The impact on demand for base metals from China may put further pressure on realisations, impacting players such as Vedanta.

The price of Brent crude oil, too, has corrected from about $70 a barrel to nearly $55 a barrel now. This, again, is not good news for the oil & gas segment of Vedanta, as it contributed slightly less than a fifth to the firm’s overall revenues during the December quarter (Q3).

It also contributed almost half the segmental profits, given the larger zinc, aluminium, and copper segments reported a decline in profit contributions. Given these developments, the Street is cautious on the base metals and oil major.

Analysts at Emkay Global said they remain cautious on the near-term demand situation in China because of the epidemic, which could lead to further correction in commodity prices.

The pressure is evident as the per-tonne aluminium price on the London Metal Exchange (LME) has slipped to the $1,690level (lowest in a year) over a fortnight, from $1,800. Aluminium contributed about a third to the overall revenues of Vedanta in the December quarter. The segment, though, benefitted from the firm’s efforts to cut the cost of production. More bauxite production, helped by lower coal prices, meant the per-tonne cost of production declined to $1,695 (down 9 per cent sequentially and 17.4 per cent year-on-year).

Though the company plans to reduce costs further to $1,500, analysts remain watchful on coal linkages as supplies may get impacted because of seasonal issues.

Meanwhile, the segment just contributed 7.8 per cent to the overall Ebit (earnings before interest and tax) during Q3 with declining aluminium realisations that averaged at $1,752 a tonne on the LME. Given the demand environment, the Street’s concerns about a further fall in realisations remain valid.

The zinc India business, represented by listed firm Hindustan Zinc, remained the second largest contributor — at about 22 per cent of the overall revenue in Q3. The segment, however, also saw its profits decline 29 per cent year-on-year because of less production of the mined metal, as well as realisations. The zinc price on the LME during the quarter at $2,388 a tonne was down 9 per cent year-on-year.

Its international zinc business also witnessed lower production at its Scorpio mines, while lower realisations remain a damper. The ramp-up at its Gamesberg mines is delayed, and the cost of production remains elevated at around $1,600 a tonne. Analysts, who remain watchful of ramp-up at Zinc International, say that it can provide impetus to growth.

Meanwhile, the management is confident of achieving its guided production ramp-up in the oil & gas and zinc businesses. The company is targeting the oil & gas business to exit FY20 with a production run-rate of 225,000 boepd (barrels of oil equivalent per day) compared to the exit rate of 189,000 boepd for FY19.

Analysts at Motilal Oswal Financial Services say that the next leg of growth is now dependent on the success of production ramp-up as guided for the oil & gas and zinc businesses. They, too, remain cautious about maintaining a ‘neutral’ rating on the stock and add that the recent sharp correction in commodity prices because of demand worries on account of the coronavirus outbreak does not bode well for the near-term earnings outlook.

This cautious stance is not surprising, as the higher output may not be enough to fully compensate for the fall in prices.