The profits of Vedanta Resources, the Indian metals group, will be hit this year because of changes in the country's import tariffs.
The tariff cuts announced on copper, lead and zinc imports will force Vedanta to lower its prices to compete in the domestic market.
Paul McTaggart, an analyst at Morgan Stanley, said: "This cut has come a year earlier than expected and highlights the significant political risk to which earnings are exposed. It is also a disappointment given Vedanta's wealth of governmental contacts via its non-executives."
The Indian Government had already reduced tariffs in January. Further cuts were expected but not so soon, especially after India elected a more left-wing government, led by the Congress Party, in May.
The newly installed Indian finance minister, Palaniappan Chidambaram, who announced the tariff reductions in yesterday's national Budget, was on the Vedanta board until May. Tariffs were cut yesterday on copper, zinc and lead from 20 per cent to 15 per cent. The tariff rate on aluminum, another important Vedanta product, was left unchanged at 15 per cent. Analysts expect the rates to come down further, over the next couple of years, to 10 per cent.
Vedanta said yesterday's changes would wipe $30m off underlying profits for the nine-month period to March 2005. Peter Sydney-Smith, Vedanta's finance director, said the combined effect of this year's two sets of tariffs reductions would take between $80m and $100m from Vedanta's profits, on an annualised basis. Mr Sydney-Smith said: "The key thing is that we are already reducing our cost base by investing $2bn in new projects."
The company is building new facilities such as more efficient copper smelters. Vedanta shares closed down 3 per cent at 290p. Morgan Stanley cut its profit forecasts by 9 per cent for both this financial year and next.
The Indian Government also said it would press ahead with privatisation, including the sale of the state's holding in Bharat Aluminum Company, which is 51 per cent owned by Vedanta. The news means Vedanta can now exercise its call option to buy the 49 per cent government stake.
Earlier this week, Vedanta was hit by the defection of its highly-rated chairman, Brian Gilbertson, to a rival.
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