At Rs 72.8 bn, Q4 Ebitda more than doubled y-o-y — higher zinc/silver, ore, ally volumes; better prices, decline in discount to Brent in oil and gas; cost efficiencies in aluminium/power.
Use of cash: management focus
Management is focused on dividend, capex and deleveraging. Our sensitivity analysis suggests at spot commodity prices and Rs /$ at 65, FY18 Ebitda excluding HZL will likely be ~$2 bn. Subtracting target capex excluding HZL, net interest expense, dividend portion out of attributable PAT excl HZL would result in FCF of $400m.
Dividend policy approved: The board aims to pay (i) entire dividend income received from HZL + 30% of attributable PAT excluding share of profits in HZL. We currently estimate dividend from HZL at
Rs 20/sh. If VED were to pay the entire amount, this would result in Rs 15/share of VED. 30% of PAT excluding HZL could add Rs 4/share; implying total dividend of Rs 19/share.
Balance sheet — Cairn cash support: Net debt was $5 bn as of Mar 17. Gross debt stood at $9.8 bn. VED aims to refinance upcoming maturities at lower interest costs. VED repaid $1 bn of debt post 1st April.
FY18 capex target $1.2 bn: $400m HZL, $230 Zinc International, $160m for aluminium/power, $250m for oil, $200m optional. FY17 capex was $700m.
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Aluminium: key driver for Ebitda
VED expects aluminium volumes to grow 25-30% in FY18; COP should be in line with Q4 at $1,475-1,500/t. Note that the LME was $1850/t in Q4 and it was the first quarter when aluminium broke even at the PBT level. Spot LME is higher than Q4; additionally falling alumina prices should support margins further in Q2FY18.
Zinc LME is down from the peak of $2,950 in Feb17 to $2,550 — China construction/auto concerns; better zinc production than expected. However, data on concentrate availability suggests acceleration in metal output is difficult. Our global team expects tightness in 2H17; LME: $3,000 for FY18. Recommend playing zinc through VED. In addition, (i) jump in ally prices on China cuts + cheap coal + strong volumes; (ii) deleveraging; likely high dividend yield make VED attractive. VED will be included in the Nifty from 26 May.
Our target price of Rs 313 is based on sum- of-the-parts (SOTP) of individual business. Our SOTP derived value is based on (i) Cairn at derived NAV (we assume the merger is approved), (ii) HZL at Citi’s TP with a 10% hold co discount, (iii) 0.5x P/B for the equity invested in Talwandi Sabo, (iv) 6x Sep18 EV/Ebitda-based fair values for others and (v) adjusting for preference shares to be issued.
Risks: Downside to our target could come from lower commodity prices, rupee appreciation, lower volumes, delays to the merger with Cairn India.