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BW Businessworld

Vedanta Resources: Edge Over Others

A strong commodity mix and quality assets enabled Vedanta to deliver strong margins

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Vedanta’s unique business model hinges on low-cost production from its tier-1 assets across diversified metals and minerals. The company’s operational costs across its businesses globally are in the lower half of the cost curve. Additionally, its assets are well-invested in and are managed in a manner that ensures stable returns on investment over a period of time, and environmental sustainability.

Its sensible commodity mix and quality assets enabled it to deliver strong margins despite market volatility. Besides, its inherently strong fundamentals have also helped Vedanta build a strong financial profile.

The company has seen strong EBITDA and EBITDA margins in Q3 ’17 despite a slump in prices from the global supply glut, which is increasingly being whittled away.

The three key factors that contributed to Vedanta’s better performance in FY17 are: a smart recovery in commodity prices, a low-cost business model and proactive debt management. Says Anil Agarwal, chairman of Vedanta Group, “Our production growth from our well-invested assets gives us a clear edge compared to our industry peers. We have the strongest balance sheet compared to our Indian peers and among the strongest compared to global peers with net debt-EBITDA ratio of 0.6 and gearing at 16 per cent.”  

However, the commodity prices remained low through the first half of 2016 and began to recover only by the second half and towards the end of FY17. Despite the weak environment, the company was well-positioned to take benefit of its low-cost production and move ahead.

Nearly 90 per cent of Vedanta’s commodities are expected to have the strongest demand growth for the next 15 years. The company expects that FY18 will be both a supply and demand-driven story in its sector. China’s growth recovery and environmental reforms to curb pollution will be major drivers of commodity prices.

For Zinc, global tightness in concentrate supplies coupled with supply cuts in China has been driving the price rally. In aluminum, successful implementation of Chinese reform to restrict excess capacities combined with improved demand outlook is helping prices. “We expect this momentum to continue for H2 of FY18 as China implements the production cuts,” explains Agarwal.

Vedanta started with the ramping of aluminum, and the improvement in LME has come at a very opportune time, helping the company to accelerate its journey to achieve 2.3 MTPA of aluminum capacity. Its ramp up of aluminum will contribute significantly to the total EBITDA in the coming years. Moreover, its Gamsberg Zinc project continues to be on track for its calendar year 2018 production.

The management’s focus continues to remain on maintaining strong credit matrix and using strong free cash flows to drive further reduction in gross debt. In future, the company will only invest in high-return projects in the existing businesses.

“We continue to identify next-generation resources by leveraging expertise of our business unit in central exploration groups. We remain committed to our efforts to achieve the objectives of zero harm and creating sustainable value to all shareholders,” Agarwal sums up his plans.