Vedanta's Q4FY18 results (Outperformer) - Zinc supports; high aluminium CoP remains

Q4FY18 Result Highlights: Volume led growth

• Vedanta (VEDL IN) reported EBITDA of Rs78bn includes ~Rs3.5bn accounting adjustment related to capitalisation of aluminium pot relining expenses. Adjusted for the same, EBITDA stood at Rs74.9bn, up 11% qoq (higher by 3.5% from IDFCe). EBITDA was supported by VEDL’s India zinc (up 12% qoq due to lower CoP and higher volume), aluminium (higher volume), Oil & gas (higher crude prices) and copper (higher volume along with improved product mix). This was marginally offset by international zinc (due to higher stripping ratio leading to high CoP) and iron ore (lower prices) operations. Approximately 52% of qoq increase was from Zinc-India (up 11.6% qoq to Rs36.2bn) on account of higher volume and lower CoP. VEDL ex-HZ adjusted EBITDA stood at Rs38.7bn, up 10% qoq.
• Aluminium adjusted EBITDA, at Rs9.6bn (excl ~Rs3.5bn accounting adjustment related to capitalisation of aluminium pot relining expenses), was up 58% qoq. This was despite higher CoP (US$1,970/t v/s US$1,945/t in Q3FY18) and lower blended realisation (down 1% qoq). As a result, we are unable to reconcile the upward move. The only solace was 11% qoq higher volume coupled with improved product mix.
• At Q4FY18-end, Net debt ex-HZ (incl buyers’ credit) was Rs532bn, up 19% qoq. This was due to special dividend payble by VEDL in March 2018

Key Positives: Higher zinc profits in India, higher aluminium volume

Key Negatives: Higher aluminium CoP, higher FY19E CoP guidance of International zinc ex Gamsberg (US$1,850-1,900/t), Goa mining shutdown; no clarity of reopening of copper smelter, increase in net debt

Impact on financials: Reduce FY19E/FY20E EBITDA by 4/3% to factor in higher aluminium CoP, no iron ore from Goa and copper plant disruption, offset by higher profits from Oil & gas due to higher volume

Valuation- Outperformer with a reduced TP of Rs320

VEDL’s FY19 earnings is expected to be driven by higher zinc and crude prices along with volume growth in oil, aluminium and zinc in international operation. However, high CoP in aluminium & international zinc will keep a check on profitability. We expect VEDL to record EBITDA CAGR of 16% over FY18-20E. We value it on FY20E SoTP basis and reduce our TP to Rs320 (earlier Rs353) to factor in lower earnings. Recommend Outperformer.