VS  Comparative Analysis of Rio Tinto and         Vedanta Resources              Prepared for: Lecturer Robert Major      ...
ContentsList of Abbreviations: ..............................................................................................
6.1       Liquidity Ratios: .................................................................................................
List of Abbreviations:CAGR – Compound Annual Growth RateCARC – Compound Annual Rate of ChangeLSE – London Stock ExchangeIF...
List of Tables & Figures:TablesTable 1:    Global metals and mining industry value: $ billion, 2005-2009Table 2:    Global...
1.0 Introduction:This financial report analyses and compares two metals and mining companies Rio Tinto andVedanta Resource...
2.1.1 Market Value           Table 1: Global metals and mining industry value: $ billion, 2005-2009       Year            ...
2.1.2 Market segmentation – 1   Table 2: Global metals and mining industry segmentation – 1: % share, by value 2009       ...
2.1.3 Market Segmentation – 2   Table 3: Global metals and mining industry segmentation – 2, % share, by value, 2009      ...
2.2     Company profiles:2.2.1 Vedanta Resources plc:Vedanta Resources plc is a diversified metals and mining company with...
3.0 Comparison: Rio Tinto plc vs Vedanta Resources plc:This financial report focuses on the critical analysis of the annua...
4.0 Key Figures:      4.1    Key figures 2009:                     Sales*     EBIT*     NPM*        GPM*        Total     ...
Figure 6: CAGR Rio Tinto and Vedanta Resources 2005 – 2009It is clear from the sales figures that Rio Tinto outweighs Veda...
4.3    Regional sales analysis:Figure 7: Sales (in $ millions) 2008 – 2009 and % Sales Rio Tinto:Figure 8: Sales (in $ mil...
strong in India is because most of its operations are located in India and to further support this costslike labour and el...
Figure 10: Business Segment Analysis (in $ millions) 2008 – 2009 Vedanta Resources:If we look at the figures above both of...
5.0 Managerial Performance:It is agreeable and obvious that Rio Tinto is a bigger company in terms of scale and annual tur...
5.2    Profit Ratios:Gross Profit Margin Ratios:     Rio Tinto           2005          2006             2007              ...
net profit; it’s not that visible as the net profit percentage seems to even out across the industry withRio Tinto and Ved...
When carefully analysed, you will notice that the two companies over the five year period actuallyaveraged at the same lev...
ROE:                       2005              2006              2007              2008              2009  Rio Tinto        ...
Resources is 167% - 256%. This in itself paints a picture of stability and calculated risk taking byVedanta Resources in c...
Vedanta Resources          2005           2006            2007             2008              2009    Basic E.P.S         4...
Price to Earnings Ratio & Interest Cover Ratios:Price Earnings Ratios:                           2005                    2...
8.0 Conclusion:Before we conclude, it is important to mention that comparability between Rio Tinto plc and VedantaResource...
9.0 References:Arnold, G (2004). The Financial Times Guide To Investing: The Definitive Companion To InvestmentAnd The Fin...
10.0 Appendices:      10.1 Appendix one: Consolidated Income Statement for Rio Tinto & Vedanta           Resources:   Cons...
Consolidated Income Statement – Rio Tinto             Note    Year ended      Year ended                                  ...
Discounted OperationsLoss After Tax From Discounted Operations                        19         (449)          (827)Profi...
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  1. 1. VS Comparative Analysis of Rio Tinto and Vedanta Resources Prepared for: Lecturer Robert Major Prepared by: Ankit Yadav MSC Business & ManagementMSC Business and Management – 2010/2011 1 Financial Management – 450148 & 514745
  2. 2. ContentsList of Abbreviations: ........................................................................................................................................................... 4List of Tables & Figures:...................................................................................................................................................... 5 Tables................................................................................................................................................................................. 5 Figures ............................................................................................................................................................................... 51.0 Introduction:............................................................................................................................................................... 62.0 Sector Overview: ...................................................................................................................................................... 6 2.1 Sector profile: ........................................................................................................................................................ 6 2.1.1 Market Value ....................................................................................................................................................... 7 2.1.2 Market segmentation – 1 ................................................................................................................................... 8 2.1.3 Market Segmentation – 2 .................................................................................................................................. 9 2.2 Company profiles: .............................................................................................................................................. 10 2.2.1 Vedanta Resources plc: .................................................................................................................................. 10 2.2.2 Rio Tinto plc: ..................................................................................................................................................... 103.0 Comparison: Rio Tinto plc vs Vedanta Resources plc: .................................................................................... 114.0 Key Figures: ............................................................................................................................................................ 12 4.1 Key figures 2009:................................................................................................................................................ 12 4.2 Sales performance 2005 – 2009: ..................................................................................................................... 12 4.3 Regional sales analysis: .................................................................................................................................... 14 4.4 Business Segment Analysis: ............................................................................................................................ 155.0 Managerial Performance: ...................................................................................................................................... 17 5.1 EBIT Performance 2005 – 2009: ..................................................................................................................... 17 5.2 Profit Ratios: ........................................................................................................................................................ 18 5.3 Fund Management Ratios:................................................................................................................................ 19 5.4 Asset Turnover Ratios: ...................................................................................................................................... 19 5.5 Return on Capital Employed & Return on Equity (after-tax):....................................................................... 206.0 Financial Risk .......................................................................................................................................................... 21 MSC Business and Management – 2010/2011 2 Financial Management – 450148 & 514745
  3. 3. 6.1 Liquidity Ratios: .................................................................................................................................................. 21 6.2 Capital Gearing & Debt Ratio: .......................................................................................................................... 227.0 Investor Perspective: ............................................................................................................................................. 22 7.1 Earnings per Share & Dividend Yield: ............................................................................................................. 228.0 Conclusion: .............................................................................................................................................................. 259.0 References: ............................................................................................................................................................. 2610.0 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: ........................................ 29Word Count: 3,335 (Three Thousand and Three Hundred and Thirty Five) MSC Business and Management – 2010/2011 3 Financial Management – 450148 & 514745
  4. 4. List of Abbreviations:CAGR – Compound Annual Growth RateCARC – Compound Annual Rate of ChangeLSE – London Stock ExchangeIFRS – International Financial Reporting StandardUSD – United States DollarEBIT – Earnings before Interest and TaxNPM – Net Profit MarginGPM – Gross Profit MarginEPS – Earnings per ShareROCE – Return on Capital EmployedROE – Return on EquityCR – Current RatioQR – Quick Ratio (Acid Test)MW – Mega Watt MSC Business and Management – 2010/2011 4 Financial Management – 450148 & 514745
  5. 5. List of Tables & Figures:TablesTable 1: Global metals and mining industry value: $ billion, 2005-2009Table 2: Global metals and mining industry segmentation – 1: % share, by value 2009Table 3: Global metals and mining industry segmentation – 2, % share, by value, 2009Table 4: Key figures 2009FiguresFigure 1: Global metals & mining industry value: $ billion, 2005 – 2009Figure 2: Global metals & mining industry, % share, by value, 2009Figure 3: Global metals & mining industry, % Share, by region value, 2009Figure 4: Group structure Vedanta Resources plcFigure 5: Sales performance 2005 – 2009 (in USD$ millions)Figure 6: CAGR Rio Tinto & Vedanta Resources 2005 – 2009Figure 7: Sales (in $ millions) 2008 – 2009 & % Sales Rio TintoFigure 8: Sales (in $ millions) 2008 – 2008 & % Sales Vedanta ResourcesFigure 9: Business Segment Analysis (in $ millions) 2008 – 2009 & (in%) Rio – TintoFigure 10: Business Segment Analysis (in $ millions) 2008 – 2009 & (in%) Vedanta ResourcesFigure 11: Long – Term EBIT Development (Rio Tinto & Vedanta Resources 2005 – 2009Figure 12: Trade Recievable & Trade Payable Period (Days) 2005 – 2009Figure 13: ROCE & ROE 2005 – 2009 Rio Tinto & Vedanta ResourcesFigure 14: Development of Share Price Rio Tinto & Vedanta Resources 2005 – 2009 MSC Business and Management – 2010/2011 5 Financial Management – 450148 & 514745
  6. 6. 1.0 Introduction:This financial report analyses and compares two metals and mining companies Rio Tinto andVedanta Resources in regards of financial, managerial and share price performance. A brief outlineof the sector that these two companies operate in will be discussed followed by brief description ofRio Tinto and Vedanta Resources as well. This financial report will critically review these companiesin three ways, firstly the evaluation of the comparability of both companies will be carried out whichwill look into key figures and then go into investigation of their managerial performance and then lookinto the respective financial risk carried by these two companies. Secondly, this financial report willtake an investors perspective and evaluate the share price development of these companies. Andfinally, 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 acompound annual growth rate (CAGR) of 7.1% between the span of 2005-20091. On the other handthe European market declined with a compound annual rate of change (CARC) of -5.1%, and theAsia-Pacific market increased with a CAGR of 14.2%, over the period to reach a value of $276.6billion and $1,118 billion respectively in 20092.Global metals and mining industry had a double digit growth until 2009 it is when the industry wentinto the steep decline. Recovery is expected in 2010 and the global metals and mining industry isexpected to embark on very strong growth rates. In 2009 global metals and mining industry shrank by21% in 2009 to reach a value of $1,661.2 billion, but the performance of the industry is expected toaccelerate with an anticipated CAGR of 14.9% from 2009 - 2014, this will help industry to reach avalue of $3,327.7 billion by the end of 20143. The European and Asia-Pacific markets are alsoexpected to grow with CAGRs of 9.8% and 17.1% respectively, over the same period, to reachrespective 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 theother hand coal recorded revenues of $350.8 billion in 2009, aggregating to 21.1% of the industry’soverall 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. 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)) MSC Business and Management – 2010/2011 7 Financial Management – 450148 & 514745
  8. 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. 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. 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$ 6billion. Vedanta Resources is also the first Indian manufacturing company to list on London StockExchange (LSE) in 2005. Vedanta Resources employs over 30,000 people in different locationsaround 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 stockexchange (LSE) listed company and Rio Tinto Limited, which is an Australian stock exchange listedcompany. These two companies are joined together in a dual listed company structure which istermed as Rio Tinto Group6.The main activity of the group is to find, mine and process the earth’s mineral resources whichinclude metals and minerals. Rio Tinto’s major products include aluminium, copper, diamonds, energyproducts, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore. Rio TintoGroup 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. MSC Business and Management – 2010/2011 10 Financial Management – 450148 & 514745
  11. 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 VedantaResources for year 2009 and also taking into account the business performance since 2005. RioTinto completes its fiscal year on 31st December every year and on the other hand VedantaResources completes its fiscal year on 31st March every year. Both companies Rio Tinto and VedantaResources use IFRS as their international reporting standard and five year summaries are alsoprovided 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 aswell. - 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 companiesas 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 successfulmanagement of their corporate social responsibility efforts as well. And finally, all of the reportedfinancial 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 bycomparing their financial reports. Both of the companies are headquartered in London and that’s whythey are subject to same tax rates and rules. If the operations of Rio Tinto and Vedanta Resourcesare taken into account, then Rio Tinto outperforms Vedanta Resources 6.7 times in terms of revenuesand 6 times in terms of total assets and the main reason to justify this sheer difference are the hugeoperations of Rio Tinto around the world. MSC Business and Management – 2010/2011 11 Financial Management – 450148 & 514745
  12. 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$ millionsBy looking at the figures above it is easy to point out that Rio Tinto easily outweighs VedantaResources in terms of size. In terms of the sales, EBIT, total assets and total equity Rio Tinto clearlytakes the lead over Vedanta Resources, but when it comes to net profit margin and gross profitmargin Vedanta Resources proves to be the strong contender with 13.68 % NPM in comparison ofRio Tinto’s 12.11 % and 21.93 % GPM in comparison of Rio Tinto’s 17.04 %. By looking at the abovefigure 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) MSC Business and Management – 2010/2011 12 Financial Management – 450148 & 514745
  13. 13. Figure 6: CAGR Rio Tinto and Vedanta Resources 2005 – 2009It is clear from the sales figures that Rio Tinto outweighs Vedanta Resources, but Vedanta Resourceson others hand has recorded a more stable and higher CAGR of 28.41 % in comparison to Rio Tinto’s16.25 % between 2005 – 2009. Rio Tinto recorded revenues of $ 44,036 million during FY2009, adecrease of 22.9 % compared to FY2008. For FY2009, China, the group’s largest geographicalmarket, 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 metalproduction of Vedanta Resources is sold in the Indian market – about 51 % presently and the rest isexported to growing countries in proximity to their operations, such as Far East, South East Asia,Middle East, China and Europe. MSC Business and Management – 2010/2011 13 Financial Management – 450148 & 514745
  14. 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 thecompanies have three strong sales regions, Rio Tinto has Europe which is 17% of total sales, NorthAmerica which is 23.10% of total sales and Others (Japan, Asia and Australia) which contributes35.6% of total sales. If we look at Vedanta Resources it has major markets like India whichcontributes 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 ahighly capital intensive it is not surparising that these companies are global as they have to minimisethe 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. 15. strong in India is because most of its operations are located in India and to further support this costslike 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 Chinalcowhich is a state owned firm and this partnership has helped Rio Tinto to raise its profits by 125% forthe first six months of the year8.In case of Rio Tinto when we compare the figures with last year the company has been able toimprove 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 incomparison to 18.80% in 2008 which has improved dramatically. But these figures getsovershawdowed 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 beenable to increase its sales in India from 46.2% in 2008 to 51% in 2009. In Asia the company has beenable to increase its sales from 8.40% to 20.11% in 2009, but again these figures get overshadowedby the decling figure in Others (Far East, Africa and Middle East) from 42.44% in 2008 to 27.13% in2009. 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. MSC Business and Management – 2010/2011 15 Financial Management – 450148 & 514745
  16. 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 (RioTinto Metals 76.48% in 2009 and 9.31% in Minerals) on other hand (Vedanta Resources Metals81.22% in 2009 and 18.00% in Minerals). Both of the companies have faced a decline in Metalssector of their business though the percentage of metals sales have gone up but the revenue fromthe 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 saleshave also fallen from $6,251 million to $5,318.50 million between 2008 – 2009. The major reason forthis decline is the economic downturn around the world which has caused the decline in demand ofproducts like iron, aluminum and copper.Vedanta Resources has an attractive project pipeline even at lower commodity prices and they are ontrack to produce 1 million tonnes each of copper and Zinc-Lead, 2.5 million tonnes of aluminium, 25million tonnes of iron ore and 6,500 MW of captive and commercial power. The power segment of theVedanta Resources is not been discussed in this report as no financial data is available on this part ofbusiness activity of the company. Rio Tinto has managed to reach a joint venture agreement withBHP Billiton on western Australian iron ore mines. It is expected to achieve substantial benefits forshareholders by delivering synergies and unlocking the full potential of the valuable westernAustralian 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 toVedanta Resources which has revenues of $51.30 million from other section of the business. Themain reason for this huge difference is Rio Tinto’s large product portfolio and vast operating modelaround the world. MSC Business and Management – 2010/2011 16 Financial Management – 450148 & 514745
  17. 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 twocompanies are run. This will be done by the employment of useful and key ratios. We will look at keyratios 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 howeach company has profitably sold their goods before interest and tax in respect of their total salesrevenue. 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 Resourcesover 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. 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 7,506Gross 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 1,442.8Gross 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 tosee 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. 19. net profit; it’s not that visible as the net profit percentage seems to even out across the industry withRio Tinto and Vedanta at 20.1% and 19.2% respectively. It can then be assumed or argued thatVedanta has found a way to reduce their cost of goods sold, which enabled Vedanta Resources toattain 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 theircustomers a more flexible credit line, then it can be to their advantage in customer retention. Howeverif this is a lapse on their part (Vedanta Resources) to collect fast, then in this area, they will have toimprove to match Rio Tinto. However this can be analysed further by investigating how fast the twocompanies pay up what is due when the time arises. Rio Tinto on the other hand, needs to pay upfaster than Vedanta Resources. This if not managed well might cause pressure on Rio Tinto’s cashflow. 5.4 Asset Turnover Ratios: Rio Tinto 2005 2006 2007 2008 2009 1.47 1.44 1.46 2.38 1.29Vedanta Resources 2005 2006 2007 2008 2009 1.86 2.19 2.00 1.22 .74 MSC Business and Management – 2010/2011 19 Financial Management – 450148 & 514745
  20. 20. When carefully analysed, you will notice that the two companies over the five year period actuallyaveraged at the same level of asset turnover being 1.6times. This is typical of companies with verycompetitive markets like is the case in the iron and steel mining industry. It however important to notein 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 & VedantaResources):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% ResourcesIn respect of return on capital employed, Rio Tinto clearly outperforms Vedanta with an average of20.8% to Vedanta’s 17.7% a distinctive margin of 14.9%. However this can be argued in the view thatRio Tinto might be ripping the benefits of economies of scale in this particular area more thanVedanta. It also raise the flag that although Rio Tinto performed better in this area, the rate of itsdecline is quite broader than that of Vedanta over the later part of the five year sample. MSC Business and Management – 2010/2011 20 Financial Management – 450148 & 514745
  21. 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% ResourcesRio Tinto here managed an average five year Return on Equity of 27.04% to Vedanta’s five yearaverage of 24.3% Return on Equity. This is a 10% margin. This ratio combined with Return on capitalemployed (R.O.C.E) starts to suggest that there is a possibility of Rio Tinto being a better investmentbased on returns. This might prove to be misleading if these two ratios are applied in isolation andwithout 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 ResourcesQuick 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 ResourcesVedanta Resources have proved to be a more liquid company than Rio Tinto. One very evident note isduring the 2008 boom, Rio Tinto as a company were illiquid and they could not afford to be too risky intheir dealings, while on the other hand Vedanta Resources was very liquid which can be seen in boththeir current and quick ratios. The margins of their liquidity state is something of note as the average ofRio Tinto’s liquidity for the five years period is in the range of 38%-156% while that of Vedanta MSC Business and Management – 2010/2011 21 Financial Management – 450148 & 514745
  22. 22. Resources is 167% - 256%. This in itself paints a picture of stability and calculated risk taking byVedanta 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% ResourcesDebt 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% ResourcesRio Tinto over the last five years has averaged a gearing of 50.1% compared to Vedanta Resources41.4% with Rio Tinto’s debt ratio at 58.6% to Vedanta’s 56.7%. This shows that Rio Tinto is highlygeared and might be good or bad depending on the side the risk swings to. However at the 2008boom Vedanta Resources outperformed Rio Tinto and was actually had a very low gearing ratio anddebt ratio but still was able to manage 20.7% R.O.C.E and 30.1% operating profit margin. Thesefigures outperform Rio Tinto’s 16.6% R.O.C.E and 17.56% operating profit margin. So it can beargued, 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. 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 centsDividend 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 dividendyield shows that Rio Tinto has a higher dividend yield compare to Vedanta, with a five year average of25% to Vedantas 18%. So one could argue that Rio Tinto over the past five years have been a bettercompany 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: MSC Business and Management – 2010/2011 23 Financial Management – 450148 & 514745
  24. 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 ResourcesInterest 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 ResourcesRio Tinto has fared lesser than Vedanta Resources in P/E of an average over the past five years with16% to Vedanta’s 22%, however the boom brought about 29.18% P/E for Rio Tinto to VedantaResources 10.97%. The two companies have decent interest cover ratios, however for the 2009, theinterest cover ratio of Vedanta dropped to 4.4 times in comparison to Rio Tinto’s 8.92%. We can thenspot out that this might be caused by many reasons, however if this declines any further it will forceVedanta Resources into uncomfortable territories. MSC Business and Management – 2010/2011 24 Financial Management – 450148 & 514745
  25. 25. 8.0 Conclusion:Before we conclude, it is important to mention that comparability between Rio Tinto plc and VedantaResources plc has been reasonably fair, but it has been limited in context of Rio Tinto’s sheer sizeand its vast operations around the world in comparison to Vedanta Resources. Rio Tinto’s productportfolio comprises of additional products like diamonds, gold and other base metals and also thesimilar products like Vedanta Resources (iron ore, copper, aluminium and zinc). Another factor whichhas been the limiting factor in terms of comparison is the world market presence that Rio Tinto has incomparison to Vedanta Resources.Regardless of the limitations mentioned above, the authors have been able to draw successfulfindings from the comparison. The findings and analysis in this financial document provides the fairand true picture of Rio Tinto and Vedanta Resources performance. When sales and profitability of RioTinto and Vedanta Resources is looked into it is quite clear that both of the companies experiencedstrong sales and profits during the boom times of 2005 – 2008 and both of the companies went on toacquire other mining companies or mines around the world which made both of the companies highlygeared. But as soon as decline in demand of the commodities came due to the recession both of thecompanies started having problems with sharp declines in their sales figures as much as by a quarterof 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 tosee that Vedanta Resources has managed an average of 25.98% EBIT margin in comparison to RioTinto’s 25.76% and it is also important to point out that Vedanta Resources also outperformed RioTinto by staggering 14.04% EBIT margin in 2008 boom. But on other hand Rio Tinto manages tooutperform 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. Themargins of their liquidity state is something to note as the average of Rio Tinto’s liquidity for five yearswas in the range of 38 % - 156 % when compared to Vedanta Resources which has margin ratios of167% - 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. RioTinto’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 theworld and the way these two companies manage their debts. Rio Tinto and Vedanta Resources haveto come up with some radical competitive strategies to make sure that they are better positioned thantheir other competitors like BHP Billliton, Xsatra and Arcelor Mittal and also make sure that theirshareholders are rewarded accordingly to minimise the conflict between the company managementand 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. 26. 9.0 References:Arnold, G (2004). The Financial Times Guide To Investing: The Definitive Companion To InvestmentAnd 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=53057222#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 EducationLimited.Vedanta Resources (2005 – 2009 ). Annual Report and Financial Statements. London: VedantaResources.Vedanta. (2010). Vedanta: The Group. Available: http://www.vedantaresources.com/group.aspx. Lastaccessed 21 November 2010.Webb, T. (2010). Rio Tinto Rio Tinto profits soar 125% thanks to Chinas building boom. Available:http://www.guardian.co.uk/business/2010/aug/05/rio-tinto-profits-soar-china. Last accessed 20November 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. Lastaccessed 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. Lastaccessed 14 November 2010. MSC Business and Management – 2010/2011 26 Financial Management – 450148 & 514745
  27. 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 millionContinuous OperationsRevenue 3 6,578.9 8,203.7Cost of Sales (5,136.1) (5,317.8)Gross Profit 1,442.8 2,885.9Other Operating Income 115.9 86.8Distribution Costs (163.0) (170.1)Administrative Expenses (256.8) (221.3)Special Items 4 (31.9) 11.1Operating Profit 3 1,107.0 2,592.4Investment Revenue 5 456.2 321.4Finance Costs 6 (250.2) (150.6)Net Exchange (losses)/gains on borrowings and capital 7 (132.0) ____creditorsProfit Before Taxation 1,170.0 2,592.4Tax Expense 11 (280.5) (757.7)Profit for the Year 900.5 2,005.5Attributable to:Equity Holders of the Parent Company 219.4 879.0Minority Interests 681.1 1,126.5 900.5 2,005.5 MSC Business and Management – 2010/2011 27 Financial Management – 450148 & 514745
  28. 28. Consolidated Income Statement – Rio Tinto Note Year ended Year ended 31st Dec 31st Dec 2009 US$ 2008 US$ million millionGross Sales Revenue (Including Share of equity accounted 44,036 58,065Units)Continuous OperationsRevenue 41,825 54,264Cost of Sales 3 (33,818) (37,641)Impairment Charges 5 (1,573) (8,015)Profits on Disposal of Interests in Businesses 41 692 2,231Exploration and Evaluation Costs 12 (514) (1,134)Profits on Disposal of Interests in Undeveloped Projects 12 894 489Gross Profit 7,506 10,194Share of Profit After Tax of Equity Accounted Units 6 786 1,039Operating Profit 8,292 11,233Finance ItemsNet Exchange Gains/(losses) on External Debt or 24 365 (176)Intergroup BalancesNet Gains/(losses) on derivatives not Qualifying for HedgeAccounting 261 (173)Interest Receivable and Similar Income 7 120 204Interest Payable and Similar Charges 7 (929) (1,618)Amortisation Charges (249) (292) (432) (827)Profit Before Taxation 7,860 9,178Tax 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. 29. Discounted OperationsLoss After Tax From Discounted Operations 19 (449) (827)Profit For The Year 5,335 4,609Attributable to:Outside Equity Shareholders 463 933Equity 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

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