However, extended closure of power plant units could have a material bearing on account of external sourcing.
In our view, the temporary closure of Vedanta’s (VEDL) 5 units of Jharsuguda power plant is unlikely to impact Q2FY18 production volume, though Cost of Production (CoP) of aluminum may be $15–18/t higher due to external procurement of 200 MW for balance quarter. Management stated that it has taken remedial measures and expects the plants to restart at the earliest. However, we will keep a close watch on events because if the closure extends, the impact could be material going ahead. Maintain Buy with TP of Rs 350, implying exit multiple of 4.6x FY19E EBITDA.
Impact on Q2FY18 EBITDA to be marginal
The State Pollution Control Board, Odisha (SPCB), has directed VEDL to close 3 units of 135 MW each of 1,215 MW power plant and 2 units of 600 MW each of the 2,400 MW power plant due to breach in the Ash Pond dyke wall in Jharsuguda in August end. We believe, the company can step-up PLF at remaining plants operating between 55% and 60% currently to 80-90% over balance quarter. This is likely to restrict the external power purchase to 200 MW over this period, resulting in incremental impact of Rs 15–18/t on aluminium CoP.
Quick resolution expected, but we remain watchful of events
The balance units of 1,215 MW plant and 2,400 MW plant have been permitted to operate until October 12, 2017, and September 20, 2017, respectively. VEDL has been directed to comply with certain conditions and submit an action plan within the next 5 days. We believe the company will be able to resolve the issue by Q2FY18 end and the plants will restart. However, if the closure extends beyond Q2FY18, the impact could be material as external power sourcing may be substantial and at elevated prices.
Outlook and valuations: More sweeteners in store; maintain ‘BUY’
We believe, the temporary partial closure of power plants at Jharsuguda will impact Q2FY18 EBITDA only marginally. We expect VEDL to maintain production volume as operating leverage benefits outweigh the impact of higher power cost in the short term. We will keep a close tab on events unfolding. We maintain ‘BUY/SO’ with target price of Rs 350/share.