Comparative analysis of rio tinto and vedanta resources

MSC Business and Management – 2010/2011 1 Financial Management – 450148 & 514745

VS

Comparative Analysis of Rio Tinto and Vedanta Resources

Prepared for: Lecturer Robert Major

Prepared by: Ankit Yadav

MSC Business & Management


Contents

List of Abbreviations: ........................................................................................................................................................... 4

List of Tables & Figures:...................................................................................................................................................... 5

Tables................................................................................................................................................................................. 5

Figures ............................................................................................................................................................................... 5

1.0 Introduction: ............................................................................................................................................................... 6

2.0 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: ..................................................................................................................................................... 10

3.0 Comparison: Rio Tinto plc vs Vedanta Resources plc: .................................................................................... 11

4.0 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: ............................................................................................................................ 15

5.0 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): ....................................................................... 20

6.0 Financial Risk .......................................................................................................................................................... 21


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)


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


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


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.





2.1.1 Market Value

Table 1: Global metals and mining industry value: $ billion, 2005-2009

CAGR: 2005-2009 7.1%

(Source: Datamonitor (2010))

Figure 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%)


2.1.2 Market segmentation – 1

Table 2: Global metals and mining industry segmentation – 1: % share, by value 2009


Figure 2: Global metals and mining industry, % 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%


2.1.3 Market Segmentation – 2

Table 3: Global metals and mining industry segmentation – 2, % share, by value, 2009


Figure 3: Global metals and mining industry, % Share, by region value, 2009


Category % Share

Asia-Pacific 67.3%

Europe 16.7%

Americas 16.1%

Total 100%


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.


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.


4.0 Key Figures:

4.1 Key figures 2009:

*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)

Sales* EBIT* NPM* GPM* Total assets*

Total equity*

Total debt*

Rio Tinto 44,036 8,292 12.11 % 17.04 % 97,236 45,925 51,311

Vedanta Resources

6,578.9 1,563 13.68 % 21.93 % 16,176.5 7,571.3 8,605.2


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.


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


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.


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.


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%.


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%


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


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


1.86 2.19 2.00 1.22 .74


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 Resources

9.00% 11.30% 38.60% 20.70% 8.70%

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.


ROE:

2005 2006 2007 2008 2009

Rio Tinto 33.10% 40.60% 29.40% 20.50% 11.60%

Vedanta Resources

17.10% 27.00% 43.60% 21.80% 11.80%

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 Resources

2.25 2.43 2.56 2.13 1.93

Quick Ratio:

2005 2006 2007 2008 2009

Rio Tinto 1.13 0.75 0.84 0.38 1.05

Vedanta Resources

1.89 2.03 2.00 1.76 1.67

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


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 Resources

51.20% 52.20% 36.90% 26.40% 40.50%

Debt Ratios:

2005 2006 2007 2008 2009

Rio Tinto 47.18% 43.80% 74.04% 74.94% 52.77%

Vedanta Resources

76.72% 62.48% 48.56% 42.58% 53.20%

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



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%


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:


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 Resources

22.24 17.36 10.04 10.97 50.00

Interest Cover Ratios:

2005 2006 2007 2008 2009

Rio Tinto 44.50 64.70 18.87 6.94 8.92

Vedanta Resources

10.89 15.91 16.96 17.20 4.40

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.


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.


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=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 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.


10.0 Appendices:

10.1 Appendix one: Consolidated Income Statement for Rio Tinto & Vedanta Resources:

Consolidated Income Statement – Vedanta Resources Note Year ended 31st March 2009 US$

million

Year ended 31st March 2008 US$

million

Continuous Operations

Revenue

Cost of Sales

3

6,578.9

(5,136.1)

8,203.7

(5,317.8)

Gross Profit

Other Operating Income

Distribution Costs

Administrative Expenses

Special Items

4

1,442.8

115.9

(163.0)

(256.8)

(31.9)

2,885.9

86.8

(170.1)

(221.3)

11.1

Operating Profit

Investment Revenue

Finance Costs

Net Exchange (losses)/gains on borrowings and capital creditors

3

5

6

7

1,107.0

456.2

(250.2)

(132.0)

2,592.4

321.4

(150.6)

____

Profit Before Taxation

Tax Expense

11

1,170.0

(280.5)

2,592.4

(757.7)

Profit for the Year 900.5 2,005.5

Attributable to:

Equity Holders of the Parent Company

Minority Interests

219.4

681.1

900.5

879.0

1,126.5

2,005.5


Consolidated Income Statement – Rio Tinto Note Year ended 31st Dec

2009 US$ million

Year ended 31st Dec

2008 US$ million

Gross Sales Revenue (Including Share of equity accounted Units)

44,036 58,065

Continuous Operations

Revenue

Cost of Sales

Impairment Charges

Profits on Disposal of Interests in Businesses

Exploration and Evaluation Costs

Profits on Disposal of Interests in Undeveloped Projects

3

5

41

12

12

41,825

(33,818)

(1,573)

692

(514)

894

54,264

(37,641)

(8,015)

2,231

(1,134)

489

Gross Profit

Share of Profit After Tax of Equity Accounted Units

6

7,506

786

10,194

1,039

Operating Profit

Finance Items

Net Exchange Gains/(losses) on External Debt or Intergroup Balances

Net Gains/(losses) on derivatives not Qualifying for Hedge Accounting

Interest Receivable and Similar Income

Interest Payable and Similar Charges

Amortisation Charges

24

7

7

8,292

365

261

120

(929)

(249)

(432)

11,233

(176)

(173)

204

(1,618)

(292)

(827)

Profit Before Taxation

Tax Expense

8

7,860

(2,076)

9,178

(3,742)

Profit From Continuous Operations 5,784 5,436


Discounted Operations

Loss After Tax From Discounted Operations

19

(449)

(827)

Profit For The Year 5,335 4,609

Attributable to:

Outside Equity Shareholders

Equity Shareholders of Rio Tinto (Net Earnings)

463

4,872

5,335

933

3,676

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

Comparative analysis of rio tinto and vedanta resources

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