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Comparative analysis of rio tinto and vedanta resources
1. VS
Comparative Analysis of Rio Tinto and
Vedanta Resources
Prepared for: Lecturer Robert Major
Prepared by: Ankit Yadav
MSC Business & Management
MSC Business and Management – 2010/2011 1 Financial Management – 450148 & 514745
3. 6.1 Liquidity Ratios: .................................................................................................................................................. 21
6.2 Capital Gearing & Debt Ratio: .......................................................................................................................... 22
7.0 Investor Perspective: ............................................................................................................................................. 22
7.1 Earnings per Share & Dividend Yield: ............................................................................................................. 22
8.0 Conclusion: .............................................................................................................................................................. 25
9.0 References: ............................................................................................................................................................. 26
10.0 Appendices:............................................................................................................................................................. 27
10.1 Appendix one: Consolidated Income Statement for Rio Tinto & Vedanta Resources: ........................... 27
10.2 Appendix two: Share Prices Rio Tinto and Vedanta Resources 2005 – 2009: ........................................ 29
Word Count: 3,335 (Three Thousand and Three Hundred and Thirty Five)
MSC Business and Management – 2010/2011 3 Financial Management – 450148 & 514745
4. List of Abbreviations:
CAGR – Compound Annual Growth Rate
CARC – Compound Annual Rate of Change
LSE – London Stock Exchange
IFRS – International Financial Reporting Standard
USD – United States Dollar
EBIT – Earnings before Interest and Tax
NPM – Net Profit Margin
GPM – Gross Profit Margin
EPS – Earnings per Share
ROCE – Return on Capital Employed
ROE – Return on Equity
CR – Current Ratio
QR – Quick Ratio (Acid Test)
MW – Mega Watt
MSC Business and Management – 2010/2011 4 Financial Management – 450148 & 514745
5. List of Tables & Figures:
Tables
Table 1: Global metals and mining industry value: $ billion, 2005-2009
Table 2: Global metals and mining industry segmentation – 1: % share, by value 2009
Table 3: Global metals and mining industry segmentation – 2, % share, by value, 2009
Table 4: Key figures 2009
Figures
Figure 1: Global metals & mining industry value: $ billion, 2005 – 2009
Figure 2: Global metals & mining industry, % share, by value, 2009
Figure 3: Global metals & mining industry, % Share, by region value, 2009
Figure 4: Group structure Vedanta Resources plc
Figure 5: Sales performance 2005 – 2009 (in USD$ millions)
Figure 6: CAGR Rio Tinto & Vedanta Resources 2005 – 2009
Figure 7: Sales (in $ millions) 2008 – 2009 & % Sales Rio Tinto
Figure 8: Sales (in $ millions) 2008 – 2008 & % Sales Vedanta Resources
Figure 9: Business Segment Analysis (in $ millions) 2008 – 2009 & (in%) Rio – Tinto
Figure 10: Business Segment Analysis (in $ millions) 2008 – 2009 & (in%) Vedanta Resources
Figure 11: Long – Term EBIT Development (Rio Tinto & Vedanta Resources 2005 – 2009
Figure 12: Trade Recievable & Trade Payable Period (Days) 2005 – 2009
Figure 13: ROCE & ROE 2005 – 2009 Rio Tinto & Vedanta Resources
Figure 14: Development of Share Price Rio Tinto & Vedanta Resources 2005 – 2009
MSC Business and Management – 2010/2011 5 Financial Management – 450148 & 514745
6. 1.0 Introduction:
This financial report analyses and compares two metals and mining companies Rio Tinto and
Vedanta Resources in regards of financial, managerial and share price performance. A brief outline
of the sector that these two companies operate in will be discussed followed by brief description of
Rio Tinto and Vedanta Resources as well. This financial report will critically review these companies
in three ways, firstly the evaluation of the comparability of both companies will be carried out which
will look into key figures and then go into investigation of their managerial performance and then look
into the respective financial risk carried by these two companies. Secondly, this financial report will
take an investors perspective and evaluate the share price development of these companies. And
finally, this financial report will conclude and comment on the outcomes of the critical analysis.
2.0 Sector Overview:
2.1 Sector profile:
The metals and mining industry comprises of the aluminium, iron, steel, precious metals & minerals,
coal and base metal markets.
Global metals and mining industry generated total revenue of $1,161.2 billion in 2009, posting a
compound annual growth rate (CAGR) of 7.1% between the span of 2005-20091. On the other hand
the European market declined with a compound annual rate of change (CARC) of -5.1%, and the
Asia-Pacific market increased with a CAGR of 14.2%, over the period to reach a value of $276.6
billion and $1,118 billion respectively in 20092.
Global metals and mining industry had a double digit growth until 2009 it is when the industry went
into the steep decline. Recovery is expected in 2010 and the global metals and mining industry is
expected to embark on very strong growth rates. In 2009 global metals and mining industry shrank by
21% in 2009 to reach a value of $1,661.2 billion, but the performance of the industry is expected to
accelerate with an anticipated CAGR of 14.9% from 2009 - 2014, this will help industry to reach a
value of $3,327.7 billion by the end of 20143. The European and Asia-Pacific markets are also
expected to grow with CAGRs of 9.8% and 17.1% respectively, over the same period, to reach
respective values of $441.5 billion and $2,457.1 billion in 20144.
It was iron and steel that proved the most lucrative for the global metals and mining industry in 2009,
with record revenues of $1,112.1 billion, equivalent of 66.6% of the industry’s overall value. On the
other hand coal recorded revenues of $350.8 billion in 2009, aggregating to 21.1% of the industry’s
overall value.
1
Datamonitor (2010), Global Industry: Metals and Mining, Industry Profile Report.
2
Datamonitor (2010), Global Industry: Metals and Mining, Industry Profile Report.
3
Datamonitor (2010), Global Industry: Metals and Mining, Industry Profile Report.
4
Datamonitor (2010), Global Industry: Metals and Mining, Industry Profile Report.
MSC Business and Management – 2010/2011 6 Financial Management – 450148 & 514745
7. 2.1.1 Market Value
Table 1: Global metals and mining industry value: $ billion, 2005-2009
Year $ billion € billion % Growth
2005 1,264.3 909.3
2006 1,362.4 979.8 7.8 %
2007 1,634.2 1,175.3 20.0%
2008 2,102.6 1,512.1 28.7%
2009 1,661.2 1,194.7 (21.0%)
CAGR: 2005-2009 7.1%
(Source: Datamonitor (2010))
Figure 1: Global metals and mining industry value: $ billion, 2005 – 2009
(Source: Datamonitor (2010))
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8. 2.1.2 Market segmentation – 1
Table 2: Global metals and mining industry segmentation – 1: % share, by value 2009
Category % Share
Iron and Steel 66.9%
Coal 21.1%
Base Metals 5.2%
Precious Metals and Minerals 3.8%
Aluminium 3.0%
Total: 100%
(Source: Datamonitor (2010))
Figure 2: Global metals and mining industry, % share, by value, 2009
(Source: Datamonitor (2010))
MSC Business and Management – 2010/2011 8 Financial Management – 450148 & 514745
9. 2.1.3 Market Segmentation – 2
Table 3: Global metals and mining industry segmentation – 2, % share, by value, 2009
Category % Share
Asia-Pacific 67.3%
Europe 16.7%
Americas 16.1%
Total 100%
(Source: Datamonitor (2010))
Figure 3: Global metals and mining industry, % Share, by region value, 2009
(Source: Datamonitor (2010))
MSC Business and Management – 2010/2011 9 Financial Management – 450148 & 514745
10. 2.2 Company profiles:
2.2.1 Vedanta Resources plc:
Vedanta Resources plc is a diversified metals and mining company with revenues in excess of US$ 6
billion. Vedanta Resources is also the first Indian manufacturing company to list on London Stock
Exchange (LSE) in 2005. Vedanta Resources employs over 30,000 people in different locations
around the world which includes operating units in India, Zambia and Australia5.
Following is the group structure for Vedanta Resources plc:
Figure 4: Group structure Vedanta Resources plc
(Source: Vedanta Resources plc)
2.2.2 Rio Tinto plc:
Rio Tinto is an international mining group, which comprises of Rio Tinto plc, which is a London stock
exchange (LSE) listed company and Rio Tinto Limited, which is an Australian stock exchange listed
company. These two companies are joined together in a dual listed company structure which is
termed as Rio Tinto Group6.
The main activity of the group is to find, mine and process the earth’s mineral resources which
include metals and minerals. Rio Tinto’s major products include aluminium, copper, diamonds, energy
products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore. Rio Tinto
Group employs about 102,000 people. Rio Tinto Group recorded revenues of $44.36 billion7 in 2009.
5
Vedanta Resources (2010): About Us > The Group.
6
Rio Tinto Group (2010): Home > Who we are > Business Overview.
7
Datamonitor (2010). Rio Tinto: Company Profile.
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11. 3.0 Comparison: Rio Tinto plc vs Vedanta Resources plc:
This financial report focuses on the critical analysis of the annual reports of Rio Tinto and Vedanta
Resources for year 2009 and also taking into account the business performance since 2005. Rio
Tinto completes its fiscal year on 31st December every year and on the other hand Vedanta
Resources completes its fiscal year on 31st March every year. Both companies Rio Tinto and Vedanta
Resources use IFRS as their international reporting standard and five year summaries are also
provided by both of the companies as well so a longitudinal comparison can be achieved.
The main business activities of both of the business are similar and they pursue same strategy as
well.
- Rio Tinto operates via six business groups: aluminium; copper; diamonds and minerals;
energy; iron ore; and other operations;
- Vedanta Resources conducts its activities through five business segments: copper; aluminium;
zinc; iron ore and other operations;
- Both of the companies have similar international strategy as both of them have international
operations.
From all of the above topics the last point stands out to be most important for both of the companies
as both of the companies will be affected by developments in markets where they operate i.e.
regulatory concerns, demand and supply issues, higher environmental responsibility and successful
management of their corporate social responsibility efforts as well. And finally, all of the reported
financial figures are calculated in United States Dollar (USD).
This financial document tries to give a true and fair picture of Rio Tinto and Vedanta Resources by
comparing their financial reports. Both of the companies are headquartered in London and that’s why
they are subject to same tax rates and rules. If the operations of Rio Tinto and Vedanta Resources
are taken into account, then Rio Tinto outperforms Vedanta Resources 6.7 times in terms of revenues
and 6 times in terms of total assets and the main reason to justify this sheer difference are the huge
operations of Rio Tinto around the world.
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12. 4.0 Key Figures:
4.1 Key figures 2009:
Sales* EBIT* NPM* GPM* Total Total Total
assets* equity* debt*
Rio Tinto 44,036 8,292 12.11 % 17.04 % 97,236 45,925 51,311
Vedanta 6,578.9 1,563 13.68 % 21.93 % 16,176.5 7,571.3 8,605.2
Resources
*all in USD$ millions
By looking at the figures above it is easy to point out that Rio Tinto easily outweighs Vedanta
Resources in terms of size. In terms of the sales, EBIT, total assets and total equity Rio Tinto clearly
takes the lead over Vedanta Resources, but when it comes to net profit margin and gross profit
margin Vedanta Resources proves to be the strong contender with 13.68 % NPM in comparison of
Rio Tinto’s 12.11 % and 21.93 % GPM in comparison of Rio Tinto’s 17.04 %. By looking at the above
figure it is clear that both of the companies are highly leveraged.
4.2 Sales performance 2005 – 2009:
Figure 5: Sales performance 2005 – 2009 (in USD$ millions)
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13. Figure 6: CAGR Rio Tinto and Vedanta Resources 2005 – 2009
It is clear from the sales figures that Rio Tinto outweighs Vedanta Resources, but Vedanta Resources
on others hand has recorded a more stable and higher CAGR of 28.41 % in comparison to Rio Tinto’s
16.25 % between 2005 – 2009. Rio Tinto recorded revenues of $ 44,036 million during FY2009, a
decrease of 22.9 % compared to FY2008. For FY2009, China, the group’s largest geographical
market, accounted for 24.16 % of the total revenues. Vedanta Resources recorded revenues of $
6,578.9 million during FY2009, a decrease of 19.81 % compared to FY2008. A majority of the metal
production of Vedanta Resources is sold in the Indian market – about 51 % presently and the rest is
exported to growing countries in proximity to their operations, such as Far East, South East Asia,
Middle East, China and Europe.
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14. 4.3 Regional sales analysis:
Figure 7: Sales (in $ millions) 2008 – 2009 and % Sales Rio Tinto:
Figure 8: Sales (in $ millions) 2008 – 2009 and % Sales Vedanta Resources:
By looking at the above sale figures of Rio Tinto and Vedanta Resources it is clear that both of the
companies have three strong sales regions, Rio Tinto has Europe which is 17% of total sales, North
America which is 23.10% of total sales and Others (Japan, Asia and Australia) which contributes
35.6% of total sales. If we look at Vedanta Resources it has major markets like India which
contributes 51% of the total sales, Asia which is 20.11% of the total sales and Others (Far East,
Africa and Middle East) which contribute 27.13% of the sales. As Metals and Mining industry is a
highly capital intensive it is not surparising that these companies are global as they have to minimise
the risk by speading out in different locations globally. Main reason for Vedanta Resouces being so
MSC Business and Management – 2010/2011 14 Financial Management – 450148 & 514745
15. strong in India is because most of its operations are located in India and to further support this costs
like labour and electricity are by far cheaper in India than any other developing or developed country.
Rio Tinto has vast reach arournd the world as it owns several mines with Chinese firms like Chinalco
which is a state owned firm and this partnership has helped Rio Tinto to raise its profits by 125% for
the first six months of the year8.
In case of Rio Tinto when we compare the figures with last year the company has been able to
improve on previous year 2008, North America contributed 23.10% in 2009 in comparision to 22.40%
which is slighlty better, but if we look at China the total contribution was 24.30% in 2009 in
comparison to 18.80% in 2008 which has improved dramatically. But these figures gets
overshawdowed by the decling sales figures in Europe from 24.30% in 2008 to 17.00% in 2009.
In Case of Vedanta Resources when we compare the figures with last year the company has been
able to increase its sales in India from 46.2% in 2008 to 51% in 2009. In Asia the company has been
able to increase its sales from 8.40% to 20.11% in 2009, but again these figures get overshadowed
by the decling figure in Others (Far East, Africa and Middle East) from 42.44% in 2008 to 27.13% in
2009.
4.4 Business Segment Analysis:
Figure 9: Business Segment Analysis (in $ millions) 2008 – 2009 Rio Tinto:
8
Webb, T.(2010). Rio Tinto Profits Soar 125% thanks to China’s building boom.
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16. Figure 10: Business Segment Analysis (in $ millions) 2008 – 2009 Vedanta Resources:
If we look at the figures above both of the companies have strong interest in Metals and Minerals (Rio
Tinto Metals 76.48% in 2009 and 9.31% in Minerals) on other hand (Vedanta Resources Metals
81.22% in 2009 and 18.00% in Minerals). Both of the companies have faced a decline in Metals
sector of their business though the percentage of metals sales have gone up but the revenue from
the metals sector have gone down for Rio Tinto sales have fallen from $44,023.00 million to
$33,680.00 million between 2008 – 2009 and it’s the same case with Vedanta Resources its sales
have also fallen from $6,251 million to $5,318.50 million between 2008 – 2009. The major reason for
this decline is the economic downturn around the world which has caused the decline in demand of
products like iron, aluminum and copper.
Vedanta Resources has an attractive project pipeline even at lower commodity prices and they are on
track to produce 1 million tonnes each of copper and Zinc-Lead, 2.5 million tonnes of aluminium, 25
million tonnes of iron ore and 6,500 MW of captive and commercial power. The power segment of the
Vedanta Resources is not been discussed in this report as no financial data is available on this part of
business activity of the company. Rio Tinto has managed to reach a joint venture agreement with
BHP Billiton on western Australian iron ore mines. It is expected to achieve substantial benefits for
shareholders by delivering synergies and unlocking the full potential of the valuable western
Australian iron ore assets in an era of increasing demand for this vital commodity.
In end, others section of Rio Tinto has contributed $6,257.00 million around 14.21% in comparison to
Vedanta Resources which has revenues of $51.30 million from other section of the business. The
main reason for this huge difference is Rio Tinto’s large product portfolio and vast operating model
around the world.
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17. 5.0 Managerial Performance:
It is agreeable and obvious that Rio Tinto is a bigger company in terms of scale and annual turnover.
However to really compare the financial standings of the two firms, we have to look at the way the two
companies are run. This will be done by the employment of useful and key ratios. We will look at key
ratios in the terms of their profitability, liquidity, gearing and investor ratio.
5.1 EBIT Performance 2005 – 2009:
Figure 11: Long-term EBIT development (Rio Tinto & Vedanta Resources):
When it comes to this ratio, scale and size of operation is not relevant because it strictly considers how
each company has profitably sold their goods before interest and tax in respect of their total sales
revenue. One would argue that Rio Tinto should have a better EBIT margin than Vedanta Resources;
however these ratios suggest that although Rio Tinto operates on a bigger scale, Vedanta Resources
over a five year period has managed an average of 25.98% EBIT margin to Rio Tinto’s 25.76%.
Vedanta Resources also managed to outperform Rio Tinto in the 2008 boom by a staggering 14.04%.
MSC Business and Management – 2010/2011 17 Financial Management – 450148 & 514745
18. 5.2 Profit Ratios:
Gross Profit Margin Ratios:
Rio Tinto 2005 2006 2007 2008 2009
Revenue $ million 20,742 25,440 33,518 58,065 44,036
Gross Profit 6,992 8,974 8,571 10,194 7,506
Gross Profit Margin 33.70% 35.28% 25.57% 17.55% 17.04%
Vedanta Resources 2005 2006 2007 2008 2009
Revenue $ million 1,884.2 3,701.8 6,502.2 8,203.7 6,578.9
Gross Profit 469.4 1,110.4 2,661.8 2,885.9 1,442.8
Gross Profit Margin 24.91% 30.00% 40.93% 35.17% 21.93%
Net Profit Margin Ratios:
Rio Tinto 2005 2006 2007 2008 2009
Revenue $ million 20,742 25,440 33,518 58,065 44,036
Net Profit 5,498 7,867 7,746 4,609 5,335
Net Profit Margin 26.50% 30.92% 23.10% 7.94% 12.11%
Vedanta Resources 2005 2006 2007 2008 2009
Revenue $ million 1,884.2 3,701.8 6,502.2 8,203.7 6,578.9
Net Profit 234.7 654.3 1,811.7 2,005.5 900.5
Net Profit Margin 12.45% 17.67% 27.86% 24.45% 13.68%
Rio Tinto averaged 25.8% gross profit margin and 20.1% net profit margin in the five year period,
compared to Vedanta’s 30.6% gross profit margin and 19.2% in the same five year period. It is clear to
see that although Vedanta managed to make a distinctively higher gross profit, but when it comes to
MSC Business and Management – 2010/2011 18 Financial Management – 450148 & 514745
19. net profit; it’s not that visible as the net profit percentage seems to even out across the industry with
Rio Tinto and Vedanta at 20.1% and 19.2% respectively. It can then be assumed or argued that
Vedanta has found a way to reduce their cost of goods sold, which enabled Vedanta Resources to
attain margins at the level which they have.
5.3 Fund Management Ratios:
Figure 12: Trade Receivable and Trade Payable Period (Days):
Here it’s evident that it takes Vedanta Resources a longer time to collect funds than it takes Rio Tinto.
This can be good or bad depending on the intent. If Vedanta wants to collect late, hence giving their
customers a more flexible credit line, then it can be to their advantage in customer retention. However
if this is a lapse on their part (Vedanta Resources) to collect fast, then in this area, they will have to
improve to match Rio Tinto. However this can be analysed further by investigating how fast the two
companies pay up what is due when the time arises. Rio Tinto on the other hand, needs to pay up
faster than Vedanta Resources. This if not managed well might cause pressure on Rio Tinto’s cash
flow.
5.4 Asset Turnover Ratios:
Rio Tinto 2005 2006 2007 2008 2009
1.47 1.44 1.46 2.38 1.29
Vedanta Resources 2005 2006 2007 2008 2009
1.86 2.19 2.00 1.22 .74
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20. When carefully analysed, you will notice that the two companies over the five year period actually
averaged at the same level of asset turnover being 1.6times. This is typical of companies with very
competitive markets like is the case in the iron and steel mining industry. It however important to note
in the boom of 2008, Rio Tinto had a 95% higher asset turnover when compared to that of Vedanta.
5.5 Return on Capital Employed & Return on Equity (after-tax):
Figure 13: Return on Capital Employed & Return on Equity 2005 – 2009 (Rio Tinto & Vedanta
Resources):
ROCE:
2005 2006 2007 2008 2009
Rio Tinto 30.80% 36.00% 12.40% 16.60% 9.60%
Vedanta 9.00% 11.30% 38.60% 20.70% 8.70%
Resources
In respect of return on capital employed, Rio Tinto clearly outperforms Vedanta with an average of
20.8% to Vedanta’s 17.7% a distinctive margin of 14.9%. However this can be argued in the view that
Rio Tinto might be ripping the benefits of economies of scale in this particular area more than
Vedanta. It also raise the flag that although Rio Tinto performed better in this area, the rate of its
decline is quite broader than that of Vedanta over the later part of the five year sample.
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21. ROE:
2005 2006 2007 2008 2009
Rio Tinto 33.10% 40.60% 29.40% 20.50% 11.60%
Vedanta 17.10% 27.00% 43.60% 21.80% 11.80%
Resources
Rio Tinto here managed an average five year Return on Equity of 27.04% to Vedanta’s five year
average of 24.3% Return on Equity. This is a 10% margin. This ratio combined with Return on capital
employed (R.O.C.E) starts to suggest that there is a possibility of Rio Tinto being a better investment
based on returns. This might prove to be misleading if these two ratios are applied in isolation and
without the test for the companies efficiency, liquidity, debt and gearing.
6.0 Financial Risk
6.1 Liquidity Ratios:
Current Ratio:
2005 2006 2007 2008 2009
Rio Tinto 1.56 1.19 1.11 0.65 1.56
Vedanta 2.25 2.43 2.56 2.13 1.93
Resources
Quick Ratio:
2005 2006 2007 2008 2009
Rio Tinto 1.13 0.75 0.84 0.38 1.05
Vedanta 1.89 2.03 2.00 1.76 1.67
Resources
Vedanta Resources have proved to be a more liquid company than Rio Tinto. One very evident note is
during the 2008 boom, Rio Tinto as a company were illiquid and they could not afford to be too risky in
their dealings, while on the other hand Vedanta Resources was very liquid which can be seen in both
their current and quick ratios. The margins of their liquidity state is something of note as the average of
Rio Tinto’s liquidity for the five years period is in the range of 38%-156% while that of Vedanta
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22. Resources is 167% - 256%. This in itself paints a picture of stability and calculated risk taking by
Vedanta Resources in comparison to Rio Tinto.
6.2 Capital Gearing & Debt Ratio:
Capital Gearing Ratio:
2005 2006 2007 2008 2009
Rio Tinto 37.10% 32.50% 67.85% 66.70% 46.80%
Vedanta 51.20% 52.20% 36.90% 26.40% 40.50%
Resources
Debt Ratios:
2005 2006 2007 2008 2009
Rio Tinto 47.18% 43.80% 74.04% 74.94% 52.77%
Vedanta 76.72% 62.48% 48.56% 42.58% 53.20%
Resources
Rio Tinto over the last five years has averaged a gearing of 50.1% compared to Vedanta Resources
41.4% with Rio Tinto’s debt ratio at 58.6% to Vedanta’s 56.7%. This shows that Rio Tinto is highly
geared and might be good or bad depending on the side the risk swings to. However at the 2008
boom Vedanta Resources outperformed Rio Tinto and was actually had a very low gearing ratio and
debt ratio but still was able to manage 20.7% R.O.C.E and 30.1% operating profit margin. These
figures outperform Rio Tinto’s 16.6% R.O.C.E and 17.56% operating profit margin. So it can be
argued, the effects of high gearing for Rio Tinto in this boom market.
7.0 Investor Perspective:
7.1 Earnings per Share & Dividend Yield:
Earnings per share:
Rio Tinto 2005 2006 2007 2008 2009
Basic E.P.S 382.3 cents 557.8 cents 568.7 cents 350.8 cents 301.7 cents
Diluted E.P.S 381.1 cents 555.6 cents 566.3 cents 349.2 cents 300.7 cents
MSC Business and Management – 2010/2011 22 Financial Management – 450148 & 514745
23. Vedanta Resources 2005 2006 2007 2008 2009
Basic E.P.S 41.9 cents 130.2 cents 325.6 cents 305.4cents 76.4 cents
Diluted E.P.S 41.0 cents 128.2 cents 305.4 cents 286.7 cents 75.8 cents
Dividend yield:
Rio Tinto 2005 2006 2007 2008 2009
E.P.S $3.823 $5.578 $5.687 $3.508 $3.01
Stock Price $16.60 $17.00 $33.20 $9.30 $20.10
Dividend Yield % 23.03% 32.81% 17.12% 37.72% 14.97%
Vedanta Resources 2005 2006 2007 2008 2009
E.P.S $.419 $1.302 $3.256 $3.054 $.764
Stock Price $5.4 $7.6 $12.8 $13.10 $4.20
Dividend Yield % 7.76% 17.13% 25.43% 23.31% 18.20%
Rio Tinto has a way higher E.P.S ratio than Vedanta, possibly because of its scale and operations,
however to draw information from this, we have to examine their Dividend yield ratios. Their dividend
yield shows that Rio Tinto has a higher dividend yield compare to Vedanta, with a five year average of
25% to Vedanta's 18%. So one could argue that Rio Tinto over the past five years have been a better
company in respect to their earnings per share as well as Dividend yield.
Figure 14: Development of Share Price Rio Tinto and Vedanta Resources 2005 – 2009:
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24. Price to Earnings Ratio & Interest Cover Ratios:
Price Earnings Ratios:
2005 2006 2007 2008 2009
Rio Tinto 11.11 8.39 14.96 29.18 17.00
Vedanta 22.24 17.36 10.04 10.97 50.00
Resources
Interest Cover Ratios:
2005 2006 2007 2008 2009
Rio Tinto 44.50 64.70 18.87 6.94 8.92
Vedanta 10.89 15.91 16.96 17.20 4.40
Resources
Rio Tinto has fared lesser than Vedanta Resources in P/E of an average over the past five years with
16% to Vedanta’s 22%, however the boom brought about 29.18% P/E for Rio Tinto to Vedanta
Resources 10.97%. The two companies have decent interest cover ratios, however for the 2009, the
interest cover ratio of Vedanta dropped to 4.4 times in comparison to Rio Tinto’s 8.92%. We can then
spot out that this might be caused by many reasons, however if this declines any further it will force
Vedanta Resources into uncomfortable territories.
MSC Business and Management – 2010/2011 24 Financial Management – 450148 & 514745
25. 8.0 Conclusion:
Before we conclude, it is important to mention that comparability between Rio Tinto plc and Vedanta
Resources plc has been reasonably fair, but it has been limited in context of Rio Tinto’s sheer size
and its vast operations around the world in comparison to Vedanta Resources. Rio Tinto’s product
portfolio comprises of additional products like diamonds, gold and other base metals and also the
similar products like Vedanta Resources (iron ore, copper, aluminium and zinc). Another factor which
has been the limiting factor in terms of comparison is the world market presence that Rio Tinto has in
comparison to Vedanta Resources.
Regardless of the limitations mentioned above, the authors have been able to draw successful
findings from the comparison. The findings and analysis in this financial document provides the fair
and true picture of Rio Tinto and Vedanta Resources performance. When sales and profitability of Rio
Tinto and Vedanta Resources is looked into it is quite clear that both of the companies experienced
strong sales and profits during the boom times of 2005 – 2008 and both of the companies went on to
acquire other mining companies or mines around the world which made both of the companies highly
geared. But as soon as decline in demand of the commodities came due to the recession both of the
companies started having problems with sharp declines in their sales figures as much as by a quarter
of their sales in 2009 if compared to 2008.
If the managerial performance of Rio Tinto and Vedanta Resources is looked into then it is easy to
see that Vedanta Resources has managed an average of 25.98% EBIT margin in comparison to Rio
Tinto’s 25.76% and it is also important to point out that Vedanta Resources also outperformed Rio
Tinto by staggering 14.04% EBIT margin in 2008 boom. But on other hand Rio Tinto manages to
outperform Vedanta Resources in terms of ROCE with an average of 20.8% to Vedanta’s 17.7%.
As far as the liquidity is concerned Vedanta Resources is more liquid in comparison to Rio Tinto. The
margins of their liquidity state is something to note as the average of Rio Tinto’s liquidity for five years
was in the range of 38 % - 156 % when compared to Vedanta Resources which has margin ratios of
167% - 256%, which in itself shows how stable Vedanta Resources is.
As far as the shareholder rewards go Rio Tinto has a way higher E.P.S than Vedanta Resources,
reason for this can be the scale and size of Rio Tinto in comparison to Vedanta Resources. Rio
Tinto’s dividend yield is also high in comparison to Vedanta Resources 25% and 18% respectively.
Finally, the future of both of the companies depends upon on the state of the economy around the
world and the way these two companies manage their debts. Rio Tinto and Vedanta Resources have
to come up with some radical competitive strategies to make sure that they are better positioned than
their other competitors like BHP Billliton, Xsatra and Arcelor Mittal and also make sure that their
shareholders are rewarded accordingly to minimise the conflict between the company management
and key shareholders which can include individuals, banks and other institutional investors as well.
MSC Business and Management – 2010/2011 25 Financial Management – 450148 & 514745
26. 9.0 References:
Arnold, G (2004). The Financial Times Guide To Investing: The Definitive Companion To Investment
And The Financial Markets. Harlow: England: Pearson Education Limited.
Data Monitor. (2010). Company Profile: Rio Tinto. Available:
http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=16&hid=14&sid=04b1d744-f601-4eb6-
aa19-e85585afd9cc%40sessionmgr114. Last accessed 11 November 2010.
Data Monitor. (2010). Industry Profile: Global Metals and Mining. Available:
http://web.ebscohost.com/ehost/detail?vid=13&hid=14&sid=04b1d744-f601-4eb6-aa19-
e85585afd9cc%40sessionmgr114&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&AN=5305
7222#db=buh&AN=53057222#db=buh&AN=53057222. Last accessed 15 November 2010.
Rio Tinto (2005 – 2009). Annual Report and Financial Statements. London: Rio Tinto.
Rio Tinto. (2010). Business Overview: Rio Tinto. Available:
http://www.riotinto.com/whoweare/business_overview.asp. Last accessed 12 November 2010.
McLaney, E and Atrill, P (2008). Accounting an Introduction. Essex: England: Pearson Education
Limited.
Vedanta Resources (2005 – 2009 ). Annual Report and Financial Statements. London: Vedanta
Resources.
Vedanta. (2010). Vedanta: The Group. Available: http://www.vedantaresources.com/group.aspx. Last
accessed 21 November 2010.
Webb, T. (2010). Rio Tinto Rio Tinto profits soar 125% thanks to China's building boom. Available:
http://www.guardian.co.uk/business/2010/aug/05/rio-tinto-profits-soar-china. Last accessed 20
November 2010.
Yahoo Finance. (2010). Vedanta Resources Plc (VED.L). Available:
http://uk.finance.yahoo.com/q/hp?s=VED.L&b=8&a=11&c=2006&e=21&d=09&f=2009&g=m. Last
accessed 14 November 2010.
Yahoo Finance. (2010). Rio Tinto Plc (RIO.L). Available:
http://uk.finance.yahoo.com/q/hp?s=RIO.L&b=1&a=00&c=2006&e=21&d=09&f=2009&g=m. Last
accessed 14 November 2010.
MSC Business and Management – 2010/2011 26 Financial Management – 450148 & 514745
27. 10.0 Appendices:
10.1 Appendix one: Consolidated Income Statement for Rio Tinto & Vedanta
Resources:
Consolidated Income Statement – Vedanta Resources Note Year ended Year ended
31st March 31st March
2009 US$ 2008 US$
million million
Continuous Operations
Revenue 3 6,578.9 8,203.7
Cost of Sales (5,136.1) (5,317.8)
Gross Profit 1,442.8 2,885.9
Other Operating Income 115.9 86.8
Distribution Costs (163.0) (170.1)
Administrative Expenses (256.8) (221.3)
Special Items 4 (31.9) 11.1
Operating Profit 3 1,107.0 2,592.4
Investment Revenue 5 456.2 321.4
Finance Costs 6 (250.2) (150.6)
Net Exchange (losses)/gains on borrowings and capital 7 (132.0) ____
creditors
Profit Before Taxation 1,170.0 2,592.4
Tax Expense 11 (280.5) (757.7)
Profit for the Year 900.5 2,005.5
Attributable to:
Equity Holders of the Parent Company 219.4 879.0
Minority Interests 681.1 1,126.5
900.5 2,005.5
MSC Business and Management – 2010/2011 27 Financial Management – 450148 & 514745
28. Consolidated Income Statement – Rio Tinto Note Year ended Year ended
31st Dec 31st Dec
2009 US$ 2008 US$
million million
Gross Sales Revenue (Including Share of equity accounted 44,036 58,065
Units)
Continuous Operations
Revenue 41,825 54,264
Cost of Sales 3 (33,818) (37,641)
Impairment Charges 5 (1,573) (8,015)
Profits on Disposal of Interests in Businesses 41 692 2,231
Exploration and Evaluation Costs 12 (514) (1,134)
Profits on Disposal of Interests in Undeveloped Projects 12 894 489
Gross Profit 7,506 10,194
Share of Profit After Tax of Equity Accounted Units 6 786 1,039
Operating Profit 8,292 11,233
Finance Items
Net Exchange Gains/(losses) on External Debt or 24 365 (176)
Intergroup Balances
Net Gains/(losses) on derivatives not Qualifying for Hedge
Accounting 261 (173)
Interest Receivable and Similar Income 7 120 204
Interest Payable and Similar Charges 7 (929) (1,618)
Amortisation Charges (249) (292)
(432) (827)
Profit Before Taxation 7,860 9,178
Tax Expense 8 (2,076) (3,742)
Profit From Continuous Operations 5,784 5,436
MSC Business and Management – 2010/2011 28 Financial Management – 450148 & 514745
29. Discounted Operations
Loss After Tax From Discounted Operations 19 (449) (827)
Profit For The Year 5,335 4,609
Attributable to:
Outside Equity Shareholders 463 933
Equity Shareholders of Rio Tinto (Net Earnings) 4,872 3,676
5,335 4,609
10.2 Appendix two: Share Prices Rio Tinto and Vedanta Resources 2005 –
2009:
Share Prices in GBP FTSE 100
Date Rio Tinto Share Price Vedanta Resources Share Price
Mar-05 £17.1 £4.7
Dec-05 £26.6 £8.7
Mar-06 £29.2 £14.1
Dec-06 £27.2 £12.2
Mar-07 £29.0 £13.3
Dec-07 £53.2 £20.5
Mar-08 £52.3 £21.0
Dec-08 £14.9 £6.1
Mar-09 £23.5 £6.8
Dec-09 £32.1 £23.9
Conversion to US $
Date Rio Tinto Share Price Vedanta Resources Share Price
Mar-05 $10.7 $2.9
Dec-05 $16.6 $5.4
Mar-06 $18.3 $8.8
Dec-06 $17.0 $7.6
Mar-07 $18.1 $8.3
Dec-07 $33.2 $12.8
Mar-08 $32.7 $13.1
Dec-08 $9.3 $3.8
Mar-09 $14.7 $4.2
Dec-09 $20.1 $14.9
MSC Business and Management – 2010/2011 29 Financial Management – 450148 & 514745
