Stock Fundamentals

Metal companies show tepid performance in Q2

Satya Sontanam | Updated on December 01, 2019 Published on December 01, 2019

Mirroring the global scenario, metal majors in India reported a tepid September quarter

The ongoing US-China trade war, uncertainties around Brexit and dampened global economic environment continued to impact global metal consumption and prices during the quarter ended September.

The domestic consumption, too, was hit by the slowdown in user industries such as automotive, building and construction and electrics. While reduced fuel and power costs — due to a fall in imported coal rates — lowered the production cost for Indian metal players, a decline in realisations and sales more than offset the gain, impacting earnings.

Hindalco, Vedanta, and Hindustan Zinc recorded a fall of 19 per cent, 32 per cent and 8 per cent (y-o-y), respectively, in consolidated profits (before tax) in Q2FY20. NALCO recorded a loss (before tax) of ₹47 crore against a profit of ₹824 crore during the same quarter last year.

Aluminium segment

In Q2FY20, the global primary aluminium consumption declined 0.2 per cent against an increase of around 4 per cent during the same period last year. Resultantly, the average LME aluminium pricefell about 14 per cent to $1,762 per tonne during the quarter ended September 30.

Despite this, the operational performance of Novelis, the US subsidiary of Hindalco, was decent. The total volumes of Novelis went up 3 per cent y-o-y on account of favourable market conditions.

But a fall in prices hit revenues, which went down 6.4 per cent to $2.9 billion with margins at around 13 per cent.

However, the performance of Hindalco on the domestic front during the quarter was subdued.

While the sales of primary aluminium remained flat compared with the previous year, revenue and operating profit fell to ₹5,526 crore and ₹849 crore, down 10 per cent and 38 per cent y-o-y, respectively.

So was the case with Vedanta. Despite reporting flat volumes (just marginally lower than the previous year), the revenue from the aluminium segment went down to ₹6,576 crore, down 17 per cent y-o-y. At the operating level, the firm recorded a loss of ₹176 crore against a profit of ₹215 crore during the same period last year.

The performance of State- run NALCO was also sombre. NALCO recorded a revenue of ₹1,527 crore, down 12 per cent y-o-y, and operating losses of ₹120 crore against a profit of ₹184 crore in Q2 FY19.

Zinc and lead

Like aluminium, zinc prices have also declined to $2,348 per tonne, down 7 per cent y-o-y, despite limited supply and low stocks.

In the case of Hindustan Zinc (HZ), the impact of fall in zinc prices was, to an extent, offset by the recovery in silver prices, which were up 13 per cent y-o-y.

The total revenue of HZ for the quarter was ₹4,511 crore, down 6 per cent y-o-y, largely due to lower zinc prices.

Further, a higher cost of production in the quarter, on account of lower ore grades, higher mine development expenses and an increase in cement prices, exerted pressure on the operating profit.

But the performance of Zinc International, a 100 per cent subsidiary of Vedanta operating from South Africa, improved significantly.

This was on account of increased production and reduced costs supported by a newly commissioned mine at Gamsberg.

Copper segment

Mine disruptions in CY2019 in Peru, Chile, and Africa impacted the supply of copper. The demand for the metal also has been tepid so far. The average LME price of copper in Q2FY20 fell to $5,802 per tonne, down 5 per cent y-o-y.

Hindalco’s copper production during the second quarter of FY20 was impacted due to rains in Dahej, Gujarat. But volumes of copper metal and continuous cast rods were up 4 per cent and 14 per cent y-o-y ,respectively.

However, a fall in realisations, especially in copper’s by-products such as sulphuric acid, dragged down the financials. Hindalco’s revenue and operating profit from its copper division was down 6 per cent and 36 per cent y-o-y, respectively.

In the case of Vedanta, while its smelter at Tuticorin — a key contributor to the company’s production — was shut down in May 2018, the copper refinery business at Silvassa and Fujiura in West Asia continues.

Despite falling copper prices, revenue of Vedanta from the copper segment went up 34 per cent y-o-y. However, it recorded operating losses of ₹105 crore against a profit of ₹12 crore last year.

Published on December 01, 2019
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