Q4 comment. Vedanta: Profitability of key segments under pressure

Metal conglomerate, Vedanta ’s stock fell by about 3 per cent in today’s trade post its announcement of Q4 results on Tuesday.

In the latest March quarter, the company’s consolidated revenues and operating profits were down 12 per cent each, as compared to a year ago period. This was on account of subdued growth in volumes and realisations in its key segments - Indian operations of zinc, copper and aluminium.

While the impact of rupee depreciation and operational performance of other segments such as oil and gas, steel, international operations of zinc and iron ore were positive, profits continued to be under pressure. The net profit for the quarter fell by 43 per cent to Rs 3,218 crore.

Zinc India- drop in volumes

The Indian operations of the zinc ( Hindustan Zinc ) continued to be under pressure as the metal’s production and sales volumes in the March quarter were down 15 per cent each as compared to the previous year. Transitioning to absolute under-ground mining of the metal in India, led to cost of production shooting up by 17 per cent to Rs 69,600, from Rs 59,600 per tonne a year ago. This was worsened by the lower LME prices of the metal that were hovering at an average of $2,702 per tonne in the quarter, a fall of 21 per cent year-on-year.

All these factors exerted pressure on the profitability of the company’s India zinc operations with operating profit falling 23 per cent to Rs 2,777 crore in the March quarter. Despite lower metal prices, the international operations of the zinc were buoyant with higher sales volumes and drop in cost of production. The cost control measures helped in boosting the operating profits by 51 per cent to Rs 391 crore.

Oil & Gas gave a leg up

Despite tepid production and sales volumes of oil & gas in the quarter ending March 2019, the revenues from this segment grew 15 per cent to Rs 3,175 crore on account of rupee depreciation and higher realisations. Though the global Brent price per barrel was down by 6 per cent during the quarter, the company managed to improve its average realisations by 5 per cent to $62.1 per barrel. The operating profit for the segment went up by 20 per cent to Rs 1,805 crore, which accounted for about 29 per cent of the consolidated operating profits.

De-growth in copper and aluminium

The shutting-down of Tuticorin copper plant in Tamil Nadu led to operating losses of Rs 69 crore for this segment in the March quarter. This compares to profits of about Rs 347 crore during the same period last year.

Also read:Sterlite Copper unit shutdown led to Rs 20k cr loss to economy: CEO P Ramnath

Meanwhile, aluminium segment, which contributed nearly 30 per cent to company’s consolidated revenues, saw operating profit margins fall sharply to 6 per cent in the March quarter from 17 per cent a year ago. While there was a reduction in cost of production by around 10 per cent, the fall of 14 per cent in the LME prices of the metal to $1,859 per tonne exerted pressure on the profitability. This along with weak demand and sales led to operating profits from this segment declining by 68 per cent y-o-y to Rs 397 crore. This is close to what the recently acquired Electrosteel Steels contributed to the consolidated profits.

Electrosteel, which Vedanta acquired recently , accounted for less than 7 per cent (Rs 1,581 crore) of the company’s consolidated revenues. Reporting operating profit of Rs 337 crore in the March quarter, its margins grew to 21 per cent from 17 per cent a year ago.

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