Highly-leveraged Indian metals and mining companies including Vedanta, Tata Steel, Jindal Steel & Power, SAIL, Hindalco and JSW SteelNSE 5.00 % are expected to report a sharp fall in their earnings following lower commodity prices and falling demand. This would also raise concerns over their debt repayment abilities. These companies together have a net debt of Rs 3 lakh crore.
A sharp correction in the commodity prices over the past few weeks is likely to wipe out most of the earnings of metals and mining sector companies and may even lead to net losses in some cases. These companies have been executing heavy capex plans funded largely by debt. The tough economic scenario amid high debt exposure has resulted in 40-60% erosion in their market capitalisation in the year to date.
Shares of Vedanta and Hindalco have fallen the steepest by 60%. Both the companies have high dependency on aluminium, wherein prices have fallen by over 14% in 2020 so far. The expected net debt relative to the operating profit before depreciation and amortisation (Ebitda) for FY20 on consolidated basis appears to be well in the limit for Vedanta at 1.2 times and for Hindalco at 2.4 times. But, possibility of a sharp fall in Ebitda in the fourth quarter (March 2020 quarter) may upset analyst est .
In addition, cash generated by a group company may not be easily transferable to the parent company. For instance, cash generated by Hindustan ZincNSE 6.97 % cannot be transferred into Vedanta, the parent company without tax leakages.
Vedanta’s businesses include oil, aluminum, copper and power. International crude oil prices have fallen by 60% while that of aluminium and copper have dropped by 14% and 22% respectively in 2020 so far.