Vedanta: Maintain ‘hold/SP’ with TP unchanged at Rs 175

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Published: July 30, 2019 1:59:53 AM

Vedanta (VEDL) reported Q1FY20 Ebitda of Rs 52 billion (down 17% year-on-year), missing consensus.

Capital allocation fears have been allayed as VEDL has unwound its structured investment in Anglo American shares, recording a gain of 0 million.

Vedanta (VEDL) reported Q1FY20 Ebitda of Rs 52 billion (down 17% year-on-year), missing consensus. Key highlights: 1) slower-than-expected ramp-up of the oil & gas (O&G) division; 2) the aluminium (Al) division’s cost of production per tonne (COP/t) fell 8% y-o-y to $1,764; 3) Impressive production ramp-up at Zinc International, iron ore and steel divisions. Going ahead, we believe the ramp-up at key divisions would be the key value driver. But the continued drop in O&G production remains a concern. The complete unwinding of related-party transaction with Volcan allays concerns around capital allocation. Maintain ‘hold/SP’ with an unchanged TP of Rs 175, implying an exit multiple of 3.6x FY21E Ebitda.

VEDL’s performance missed consensus owing to: 1) production dip of 8% y-o-y to 180 koepd in the O&G division; and 2) cost at Zinc International creeping up 7% q-o-q to $1,594 due to maintenance activities at Skorpion Zinc. We find the following positives: 1) continued cost reduction at the Al division; 2) production ramp-up at Electrosteel Steels; and 3) ramp-up of silver volume at Zinc India. The management has reiterated the FY19 production guidance for all divisions. We view the production ramp-up at the profitable O&G division as the most significant driver for the stock, but are concerned about the production drop over the past three quarters. Ramp-up at Rampur Agucha (Zinc India) and Gamsberg (Zinc International) are also growth enablers.

Capital allocation fears have been allayed as VEDL has unwound its structured investment in Anglo American shares, recording a gain of $100 million. We also find the balance sheet has sufficient strength with net debt only slightly up (to Rs 28,700 crore) owing to the seasonal spike in working capital commitment to Rs 3,100 crore, which, we believe, would progressively release. The stock is trading at 3.5x FY21E Ebitda.

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