Q2FY20 EBITDA at Rs 44.2 bn, down 15% y-o-y and q-o-q, was lower than our/consensus estimate of Rs 45.5/46.6 bn. Ebitda decline was due to low LME prices, high input costs, closure of Tuticorin copper smelter, partly offset by contribution from acquired Electrosteel plant and higher contribution from Gamsberg zinc mine. We believe that the headwinds will continue, as global growth remains sluggish due to ongoing trade conflict, resulting in subdued metal prices.
We reduce FY20e/21e EPS to Rs 12/14 (Rs 15/17 earlier) as we cut aluminum/ copper/zinc assumption by 3%/2%/2% for each FY20 and FY21 on weak LME prices. We also reduce our oil estimates by 14%/11% for FY20/21as global demand weakness continues in midst of excess spare capacity in the Middle East. Revise SoTP-based TP to Rs 168 (17% upside to CMP) from Rs 185. Maintain Buy rating.
Business wise performance
> Aluminum: Ebitda plummeted to loss of Rs 1.1 bn vs. profit of Rs 4/1.8 bn y-o-y/q-o-q due to sluggish Aluminum LME price, whereas there was marginal reduction of q-o-q cost. We believe effect of alumina price correction will be visible in coming quarters. Aluminum cost/t increased to $1,852 vs. $1,764 due to unavailability of coal in the Jharsuguda plant due to heavy rains. However, company is pushing for cost reduction. Aluminum production was subdued at 0.48 mnt, down 4% y-o-y. Management guided for FY20 CoP of $1,725-1,775/t, which we believe is challenging to achieve.
> Captive alumina: Vedanta has ramped up its captive production of alumina. Q2FY20 production was 0.41 mnt, up 18% y-o-y. Lanjigarh CoP continues to remain low at $293/t, stable q-o-q. Local sourcing of Bauxite supply now 50%. Vedanta guided for 1.7-1.8 mnt alumina production in FY20 vs. total requirement of 4 mnt. However, due to falling global prices, spread between local production and imported has declined.
> Copper smelter shutdown: The Tuticorin smelter shutdown (matter under appeal) has impacted copper performance. Q2 Ebitda loss at Rs 1.1 bn.
> Zinc International: Gamsberg commercial production started in March 2019. Gamsberg is the new mine which would partially replace old mines of Skorpion in FY20. Q2 production at 24kt, flattish q-o-q. Management revised downward the FY20 guidance of Zinc International.