Vedanta’s (VEDL) H2FY19 operating numbers were slightly lower YoY for key divisions — Zinc-India (Zn-India), Zinc-international (Zn-international) and oil & gas (O&G). However, going ahead, we expect the performance to improve due to volume uptick & cost reduction in Zn-India as geo-technical issues at Rampura Agucha (RA) mine are resolved; enhanced gas production in the O&G division; lower cost in aluminium (Al) division on higher domestic bauxite, alumina & coal sourcing; and Gamsberg ramp-up & resumption of Zn-international production at Skorpion. Maintain ‘BUY’ with target price of INR175 at an exit multiple of 4.5x FY21E EBITDA.
VEDL’s H2FY19 operating numbers were mixed. Key highlights, O&G production fell 2% due to natural decline at Mangla field, though gas volumes were better; production at Zn-India was lower due to geo-technical problems at RA mine and FY19 silver volumes missed 650-700t guidance; and in Zn-international, production at Skorpion was impacted by a 14-day strike, which negatively impacted mining activities and temporary closure of refinery. On the positive side, Electrosteel Steels (ESL) was ramped up to 1.5mtpa and aluminium production improved.
Going ahead, we expect VEDL’s operating performance to inch up due to, O&G: Higher gas production due to early gas production facility commissioned & more wells coming on line in Rajasthan oil fields; Al: Expect lower operating cost due to enhanced sourcing of coal & domestic bauxite; Zn-international: Ramp-up of Gamsburg & restart at Skorpion scheduled in April as annual shutdown was brought forward; and Zn-India: Commissioning of shafts by H1FY20.
We expect VEDL to turn around as operating leverage enhances performance at Zn-international and O&G divisions. Cost efficiencies at aluminium business should also yield better results.
We maintain ‘BUY/SO’ with target price of INR175 (exit multiple of 4.5x FY21E EBITDA).