Event update: Vedanta (Downgrade to Neutral) - Copper smelter closure; setback for Vedanta

Event

The Tamilnadu Government ordered to close Vedanta’s 400ktpa copper smelter Plant at Tuticorin permanently. This was after the protests by the local residents who claim that the smelter caused pollution 

Details

• The plant has been shut down since March 2018-end when the Tamil Nadu pollution control Board has not provided permission to run the plant.  We note that the plant remained shut down earlier too in 2013 due to a case at the National Green Tribunal. The plant provide employment of 3,500 people directly.
• The company was in the process of setting up 400ktpa smelter at Tuticorin at an estimated capex of US$717m. The company has already awarded the EPC contract and the project was scheduled to be commissioned by Q3FY20. The company has spent ~US$190m on the same till FY18. However, the Madras High Court stayed the expansion on 23rd May 2018.The court stated that the application for renewal of environment clearance shall be processed after conduct of public hearing and will be decided on or before 23rd September 2018
• The existing copper plant produces 403kt of copper and generated EBITDA of Rs13.1bn (~5% of FY18 consolidated EBITDA).

Our view: Revise downwards our TP to Rs279; downgrade to Neutral

Though the company is expected to appeal against the closure order but any favourable outcome, if any, will take long. Accordingly, we remove the copper earnings from our FY19 & FY20 numbers amid the state government order of closure of the plant. As a result, we reduce our EBITDA by ~5% in each of FY19 & FY20. We still have not factored in any one time cost which may occur in case of permanent shutdown. Though the earning hit is low but the event should lead to contraction in valuation multiple. We now value the standalone business at 6.0x (earlier 6.5x) in our SoTP value. As a result, we revise our target price downwards to Rs 279 (earlier Rs320). Vedanta’s aluminium business earnings is also at risk with higher CoP. We believe that the stock should remain under pressure in the short term and await further correction to re-enter the stock. We downgrade it to Neutral.