We expect Vedanta 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 Rs 175
Vedanta’s (VEDL’s) H2FY19 operating numbers were slightly lower y-o-y 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: (i) volume uptick & cost reduction in Zn-India as geo-technical issues at Rampura Agucha (RA) mine are resolved; (ii) enhanced gas production in the O&G division; (iii) lower cost in aluminium (Al) division on higher domestic bauxite, alumina & coal sourcing; and (iv) Gamsberg ramp-up & resumption of Zn-international production at Skorpion. Maintain Buy with target price of Rs 175 at an exit multiple of 4.5x FY21e (estimates) Ebitda.
Slight decline in operating numbers
VEDL’s H2FY19 operating numbers were mixed. Key highlights: (i) O&G production fell 2% due to natural decline at Mangla field, though gas volumes were better; (ii) production at Zn-India was lower due to geo-technical problems at RA mine and FY19 silver volumes missed 650-700t guidance; and (iii) 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 1.5-mtpa and aluminium production improved.
Production likely to ramp-up across all divisions
Going ahead, we expect Vedanta’s operating performance to inch up due to:
(i) O&G: Higher gas production due to early gas production facility commissioned and more wells coming on line in Rajasthan oil fields; (ii) Al: Expect lower operating cost due to enhanced sourcing of coal & domestic bauxite; (iii) Zn-international: Ramp-up of Gamsburg & restart at Skorpion scheduled in April as annual shutdown was brought forward; and (iv) Zn-India: Commissioning of shafts by H1FY20.
Outlook and valuation: Higher volumes to benefit; maintain ‘BUY’
We expect Vedanta 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 Rs 175 (exit multiple of 4.5x FY21e Ebitda).