Stock Fundamentals

What led to Vedanta’s steep loss in Q4?

| Updated on June 14, 2020 Published on June 14, 2020

Weak demand and prices apart, huge impairment of assets weighed on the company’s earnings

On the back of bleak demand and weak prices of commodities, the metals and mining conglomerate, Vedanta, reported subdued earnings for the quarter ended March 2020. The consolidated revenue and the operating profit (earnings before interest, taxes and depreciation) of the company for Q4FY20 was ₹19,513 crore (down 15.5 per cent y-o-y) and ₹4,844 crore (down 23 per cent y-o-y), respectively. Higher input costs and lower production volumes impacted the operational performance significantly during the quarter.

The bottom-line sprang a surprise as the company recorded a net loss of ₹12,521 crore as against a profit of ₹ 2,615 in the corresponding period of the previous year. The steep loss was primarily due to the impairment of assets in oil and gas, copper, and iron ore business.

Here, we take a look at the segmental performance of the company in Q4FY20 and any likely impact of huge impairment charges of assets on the impending delisting offer.

Oil & gas sector impacted

Among the segments of the company, the oil and gas business suffered the most with weak realisations — down by about 21 per cent y-o-y at around $48.8 per barrel — and elevated costs.

The operating profit from the segment for the quarter stood at ₹ 869 crore, down 52 per cent y-o-y. In addition, the company impaired this business by about ₹9,710 crore (net of taxes), largely driven by lowering forecasts of oil price by $20/bbl for both near term and medium term.

The zinc segment, too, was under pressure during the March quarter owing to weak demand and the LME prices of the metal dropping by about 21 per cent y-o-y to $2,128 per tonne. While Zinc India (Hindustan Zinc) reported an operating profit of ₹1,945 crore (down 30 per cent y-o-y), Zinc International’s operations recorded an operating loss of ₹61 crore against a profit of ₹391 crore in the corresponding period last year.

However, Vedanta’s aluminium segment, which had been in doldrums over the past couple of years, put up a good show during the quarter, thanks to a reduction in the cost of production, by about $350 per tonne from last year, to $1,451. This was largely due to higher domestic sourcing of bauxite (raw material) and lower coal-linkage cost. Hence, operating profit from the segment increased to ₹1,137 crore (₹397 crore in Q4FY19) during the March quarter, despite the LME prices of the metal falling by 9 per cent to $1,690/tonne y-o-y in the quarter.

The fall in costs appears to be a structural change and is expected to aid profitability going ahead.

Delisting agenda

Vedanta, on May 12, announced its holding company’s plans to delist the Indian business. The holding company — Vedanta Resources — has proposed acquiring all fully paid-up equity shares of Vedanta that are held by public shareholders at an indicative offer price of ₹87.5 per share.

This price is almost 40 per cent lower than the share price of the company just before the impact of Covid-19 as on mid-February 2020.

It is also much lower than the book value of the company as of March 2020, which has fallen significantly owing to the impairment charges.

The book value of the company, after taking into account the impairment of assets, stood at ₹147 per share as of March 2020.

The company has undertaken impairment transactions in the past, too. In the past six years, the firm has impaired assets twice and reversed the impairment loss once.

In FY16, Vedanta impaired its assets, including Cairn India — which was acquired in 2011 — to an extent of ₹12,304 crore.

This was done after acquiring Cairn India but before its merger into Vedanta. Cairn India was merged into Vedanta in April 2017 and the shares of former were delisted.

In Q4FY18, Vedanta reversed impairment losses of ₹7,016 crore (related to its oil and gas business) and made an exceptional gain.

Even in the current context, impairment loss is reversible if oil prices stabilise at higher price. Investors in Vedanta need to take note of this when tendering the shares, if the delisting proposal is accepted by the shareholders.

Currently, Vedanta is seeking shareholders’ approval for the delisting proposal.

The e-voting commenced on May 26 and will end on June 24. Once the delisting is approved by two-thirds of the shareholders, the final exit price will be determined based on the reverse book-building process, which is based on the prices at which the shares are tendered by shareholders.

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Published on June 14, 2020
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