Financial Review - Annual Report 2012 - Vedanta Resources

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33 OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALSGroup EBITDA(In US$ millions, except as stated)Turbulence in the global market andthe cost-inflationary environmentprevailing in the metal and miningindustry impacted our profitabilityin FY 2011–12. During the year, totalcash costs increased due to miningsector inflation stemming fromincreased energy and fuel coststogether with higher maintenance,labour and contractor costs, in linewith the mining industry in general.The EBITDA margin in our aluminiumbusiness reduced by 10.1%, dueto an 11.3% increase in cost ofproduction mainly due to higheralumina, carbon and coal costs. TheEBITDA margin also reduced in ourpower business due to an 18.6%reduction in the sales price per unit.Despite these tough conditions, wereported EBITDA of US$4.0 billion,12.9% higher when compared withthe previous year, underpinnedby our diversified businessportfolio which helps to insulateus from adverse performancein any one of our businesses.Our diversification into the highmargin oil & gas sector through ouracquisition of Cairn India duringthe year and the full year benefit ofoperations from the Zinc-Internationalbusiness acquired in FY 2010–11,combined with our continuedfocus on cost control measuresand operational improvements alsocontributed to the improvementin EBITDA for FY 2011–12.FY2011–12FY2010–11 % changeEBITDAMargin %2011–12However, EBITDA growth did notkeep pace with revenue growthas operating costs rose, mainlydue to higher coal costs andcommodity linked costs. Lowersales of iron ore coupled with thehike in export duty also impactedEBITDA during the financial year.EBITDAMargin %2010–11Zinc 1,610.8 1,320.9 21.9% – –– India 1,244.8 1,219.6 2.1% 53.7% 56.7%– International 1 366.0 101.3 – 41.1% 46.3%Iron Ore 721.4 1,174.1 (38.6)% 42.7% 59.3%Copper 685.9 681.4 0.7% – –– India/Australia 298.0 241.5 23.4% 7.1% 7.0%– Zambia 387.9 439.9 (11.8)% 22.7% 24.1%Aluminium 182.5 352.7 (48.3)% 9.7% 19.8%Power 122.0 43.9 177.9% 26.6% 35.4%Oil & Gas 2 713.0 0.0 – 80.8% –Others (9.3) (6.2) (50%) – –Total 4,026.3 3,566.8 12.9% 28.7% 31.2%1 Acquired in FY 2010–11.2. Acquired in FY 2011–12.EBITDA margin was 28.7% in FY2011–12 compared with 31.2% inFY 2010–11. Excluding our coppercustom smelting operations, ourEBITDA margin in FY 2011–12 was40.6% (FY 2010–11: 44.6%).Conversion of EBITDA to free cashflow for the financial year wasmarginally lower at 62.9% comparedwith 65.8% in FY 2010–11. Thisreduction is mainly attributable tohigher interest on borrowing for theCairn India acquisition and higherongoing capital expenditure.We continued to maintain our strongbalance sheet and funding position,with cash and liquid investmentstotalling US$6.9 billion. We generatedfree cash flow of US$2.5 billion whichmet the growth capital expenditurerequirement of US$2.4 billion. Ourinvestment in growth projects isnearing completion and we have nowreached an inflection point wherewe have positive free cash flow aftergrowth capex for the first time.After investing US$8.7 billion inacquisitions, net debt as at 31March 2012 was US$10.1 billion(31 March 2011: US$1.97 billion)and our gearing ratio was 35%.During the year depreciationand amortisation increased byUS$539.3 million to US$1.4 billion.Depreciation charges during theyear increased by US$372.7 millionmainly due to additional depreciationof US$180.2 million for Cairn,US$90.7 million due to the full year ofoperation for Zinc International andthe commissioning of the SEL powerplant accounting for the balance.Amortisation charges during theyear increased by US$166.6 millionmainly due to additional amortisationof reserves of US$166.5 millionat Cairn, US$92.4 million at ZincInternational, partially mitigatedby a decrease at Sesa Goa due tolower output. Oil & gas assets areamortised on a unit of productionbasis over the total remainingproven and probable reserves.Special items comprises of US$21million spent on voluntary redundancycharges at some of our operations.A provision of US$89 million wasmade by Sterlite towards possibleincidental damages payable toASARCO as per the verdict of thebankruptcy court of the SouthernDistrict of Texas, US. We also spentUS$73 million on costs relating tothe acquisition of Cairn India andIPO expenses of US$13 million,for our subsidiary Konkola CopperMines were also written off duringthe year. US$31 million was due toloss on revaluation of previously heldinterest in Cairn India as associate.As explained above, the operatingprofit for the year was US$2.4 billion,marginally lower than in the previousyear reflecting higher depreciation,amortisation charges and specialitems, despite the increase in EBITDA.Vedanta Resources plc Annual Report and Accounts 2012vedantaresources.com
34Financial Review continuedGroup Operating ResultsGroup operating results for FY 2011–12 are set out below:FY(In US$ millions, except as stated)2011–12(pro forma)FY2011–12FY2010–11 % changeRevenue 15,615.9 14,005.3 11,427.2 22.6EBITDA 5,353.3 4,026.3 3,566.8 12.9EBITDA margin (%) 34.3% 28.7% 31.2% –EBITDA margin without custom smelting (%) 46.7% 40.6% 44.7% –Special items (230.2) (230.2) (163.4) (40.9)Depreciation (1,220.7) (927.3) (554.6) (67.2)Amortisation (736.8) (481.1) (314.5) (53.0)Operating profit 3,165.6 2,387.7 2,534.3 (5.8)Net interest expense (617.1) (420.3) (103.1) (307.7)Other gains and (losses) (314.2) (314.2) 252.1 (224.6)Income from associate – 92.2 – –Profit before taxation 2,234.3 1,745.4 2,683.3 (35.0)Income tax expense (547.4) (516.7) (649.5) (20.4)Effective tax rate (%) 24.5% 29.6% 24.2% -Profit for the year 1,686.9 1,228.7 2,033.8 (39.6)Minority interest 1,478.9 1,168.9 1,263.0 (7.5)Minority interest (%) 87.7% 95.1% 62.1% –Attributable profit 208.0 59.8 770.8 (92.2)Basic earnings per share(US cents per share) 76.3 21.9 283.2 (92.3)Underlying earnings per share(US cents per share) 209.4 142.0 262.8 (46.0)By contrast, we experienced a markto-marketgains on our embeddedderivatives of US$97.1 millionprimarily on the foreign currencyconvertible bonds at Sterlite andSesa Goa. Since the issue of thesebonds the cumulative gain has beenUS$211.0 million. The gain is primarilycorrelated with the movement in therespective subsidiary’s share priceand may reverse in the future.Profit before taxation also decreasedby 35.0% to US$1.7 billion comparedagainst US$2.7 billion achievedduring FY 2010–11. Profit after taxdecreased by 39.6% to US$1.2 billiondue to higher interest costs, mark-tomarketlosses on our foreign currencyborrowings and higher tax rates. Oureffective tax rate increased from 24.2%in FY 2010–11 to 29.6% during FY2011–12 as a result of changes in profitmix at the operating companies duringthe year and also due to losses at VAL.The tax charge decreased to US$516.7million in FY 2011–12, 20% downfrom US$649.5 million in FY 2010–11reflecting the lower profit before tax.Gross finance costs increased toUS$1,170.5 million in FY 2011–12,up from US$718.0 million in FY2010–11. Costs increased as aresult of higher average debt atUS$13,750.4 million in FY 2011–12,up from US$8,895.7 million in theprevious year. Gross debt during theyear increased mainly to finance theCairn India acquisition and to fundour growth projects. Interest costsalso increased due to a higher interestrate for rupee borrowing in India.Of the total interest cost, US$224.8million relating to our ongoing capitalexpansion projects was capitalised ascompared with US$183.3 million inFY 2010–11, reflecting the increasedcapitalisation in our ongoingprojects at Vedanta Aluminium Ltd(VAL), BALCO and Talwandi Sabo.Investment income in FY 2011–12was US$525.4 million, comparedwith US$431.6 million in FY2010–11, mainly due to the higherinterest rate environment.We recognised a loss of US$314.2million as a result of mark-to-marketlosses on our foreign currencyborrowings primarily at our Indianentities, and following changesin the fair value of embeddedderivatives relating to foreign currencyconvertible bonds at Sterlite andSesa Goa. During FY 2011–12, themark-to-market loss on borrowingswas US$411.3 million against a gainof US$63.7 million in the previousyear. These mark-to-market losseswere caused by volatility in theIndian rupee/dollar exchange rate,which depreciated sharply by 14.7%in the year, moving from US$1 =Rs44.65 to US$1 = Rs51.16. The rupeedepreciation impacted the uncoveredloans denominated in US dollars.Attributable profit for the year atUS$59.8 million is significantlylower than the US$770.8 millionin the previous year which wasimpacted by increased amortisationand depreciation charges, interestexpenses related to funding forthe Cairn India acquisition, markto-marketlosses on foreigncurrency borrowings at our Indianentities and losses at VAL.Basic Earnings per Share (‘EPS) forFY 2011–12 was 21.9 US cents pershare compared to 283.2 US centsper share in FY 2010–11, reflectingthe fall in attributable profit. Fullydiluted EPS was 21.6 US cents pershare (FY 2010–11: 270.2 US cents pershare). Underlying EPS was 142.0 UScents per share as against 262.8 UScents per share in the previous year.These factors, combined with thefact that Cairn India only contributedto profitability for less than fourmonths, resulted in returns generatedon operating capital reducing to7.7%. Using 12 month proformaearnings from Cairn, our return onoperating capital would be 10.7%.Vedanta Resources plc Annual Report and Accounts 2012
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Financial Review - Annual Report 2012 - Vedanta Resources

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