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Vedanta’s problems likely to get worse with Sterlite shutdown

Vedanta’s Sterlite copper smelter may not restart for at least 12 months, and the closure may shave about $200 million-$250 million from pre-tax earnings, said Vishal Kulkarni, an analyst at S&P Global Ratings

business Updated: May 28, 2018 11:27 IST
Swansy Afonso
Swansy Afonso
Bloomberg
A private security guard stands in front of the main gate of Sterlite Industries Ltd's copper plant, a unit of London-based Vedanta Resources, in Tuticorin, Tamil Nadu.
A private security guard stands in front of the main gate of Sterlite Industries Ltd's copper plant, a unit of London-based Vedanta Resources, in Tuticorin, Tamil Nadu.(Reuters File Photo)

A troubled 2018 so far for billionaire Anil Agarwal’s Vedanta Ltd. may get worse amid concern that its key copper smelter in the port city of Tuticorin in south Tamil Nadu could remain shut until 2019, further pressuring a stock that’s down 25 percent since the start of the year.

Deadly protests last week over alleged pollution from the Tuticorin smelter have prolonged a shutdown of the 400,000 metric ton-a-year operation. After being hit earlier in the year by an iron ore mining ban and a steel acquisition roadblock, Vedanta, India’s biggest aluminium producer, has also warned it may be forced to reduce output of the metal.

The copper smelter may not restart for at least 12 months and the closure may shave about $200 million-$250 million from pre-tax earnings, said Vishal Kulkarni, a Singapore-based analyst at S&P Global Ratings. “The intensity of the protests and the intensity of the regulatory issues might mean that it could take some time.”

A combination of bad news across its operating industries has made Vedanta one of the biggest losers this year among the 10-member S&P BSE India Metal Index that’s slid by 12 percent. Concern over the stock’s growth prospects may see further falls, according to CNI Research Ltd.

Vedanta didn’t respond to emails seeking comment on the timing of the smelter closure and the share price outlook.

The Tamil Nadu government set up an inquiry after nine people were reported killed this week in protests against the smelter, which was halted for maintenance at the end of March. The closure was extended in the face of mounting opposition from villagers over allegations that pollution was hurting locals’ health. The producer has denied the claims.

Plans to double its capacity are also under threat after a local court delivered an interim order staying the expansion until a further hearing, to be held by Sept. 23, Vedanta said Wednesday.

For the next nine months, any meaningful earnings from the unit would be a “very optimistic scenario, ” Kulkarni said in a phone interview. “In the past, similar regulatory issues and social unrest has limited Vedanta’s ability to mine bauxite in the eastern Indian state of Odisha.”

Vedanta’s pre-tax earnings may be Rs 302.99 billion ($4.4 billion) this fiscal year, according to the average of 19 analyst estimates compiled by Bloomberg. That’s an improvement on the Rs 251.64 billion reported last fiscal year.

While copper and iron ore look small on the company’s balance sheet, they were considered as stable and solid cash flow providers that didn’t attract much commodity price risk, Kulkarni said.

As well as potential output cuts at its aluminium plant on coal shortages, there are media reports that the Indian government is considering a price-linked windfall tax on oil producers. If that happens it may squeeze the company’s money-spinning oil and gas unit.

All these factors have made investors wary about Vedanta’s growth prospects and may trigger further exodus from the stock, according to CNI Research’s Chairman Kishor Ostwal. He expects a further 10 percent to 20 percent loss, if the problems persist for a longer period.

“A lot of investors will have concerns,” Ostwal said. In the case of the copper unit, “it is a political issue and we need to see how it gets resolved,” he said.