Q1 EBITDA at`52 bn, down 21%/11% y-o-y/q-o-q, was in line with our/consensus estimate of `53/55 bn. Ebitda decline was due to low LME prices, high input costs, closure of Tuticorin copper smelter, partly offset by strong USD and contribution from acquired Electrosteel plant.
Volcan investment
Vedanta is closing the structured investment it made on Anglo American PLC (AAL) with its parent company Volcan. This is a positive move, as the deal was an overhang on the stock due to high level of debt at parent level and Vedanta’s capital allocation strategy.
We reduce our FY20e/21e EPS to `15/15 (`18/16 earlier) as we decrease INR depreciation assumption. However, our SoTP-based TP is broadly unchanged at `184 (12% upside from CMP of `164) as Vedanta will monetise its Volcan investment. Maintain Add.
Key highlights
Unwinding of structured investment with Volcan: During Dec’18, Vedanta through one of its subsidiaries purchased economic interest in a structured investment in Anglo American PLC (AAL) from its parent Volcan Investments. Total investment was $550 mn. Volcan divesting its entire 20% stake in AAL will result in exercising the early exchange option available to Volcan. Management informed net gain of over $100 mn in this transaction to Vedanta. Volcan invested in Anglo American (AAL) in 2017. Share price of AAL has nearly doubled since then. Management mentioned it will not enter any such structured arrangement with parent company in the future.
Metal price scenario: Base metal prices remained volatile WoW, as stalemate in US-China trade talks continues. Aluminum/Zinc/Copper/Lead/Silver corrected 21%/21%/11%/11% /10% y-o-y in Q1FY20. Current prices continue to remain subdued. Due to declining expectations of US and China coming to trade agreement anytime soon after the recent downbeat rhetoric from both sides, we maintain cautious view on metal price scenario against the backdrop of declining global growth.
Captive alumina: In the conference call, it was highlighted that Vedanta has ramped up its captive production of alumina. Production during Q1FY20 was 0.44 mtpa, up 37%/5% y-o-y/q-o-q, with exit run-rate of 1.8 mtpa. Lanjigarh CoP is at $284/t, the lowest in last 2 years. Local sourcing of Bauxite supply now increased to 53% vs. 50% q-o-q. Vedanta guided for 1.7-1.8 mnt alumina production in FY20 vs. total requirement of 4 mnt. This will cushion high volatility of international prices. However, due to falling global prices, spread between local production and imported has declined significantly.