Vedanta's Q1FY19 results (Upgrade to Outperformer) - Oil & aluminium restricts earnings fall

Q1FY19 Result Highlights: Aluminium surprises positively

Vedanta (VEDL IN) reported in-line adjusted EBITDA of Rs65.3bn, down 18% qoq (2% lower than IDFCe) due to lower profits from zinc businesses on account of lower volume and higher CoP, partly offset by higher oil & gas business (due to ~14% qoq higher oil realisation to US$67.2/bbl). Reported EBITDA of Rs62.8bn includes forex loss of ~Rs2.5bn.

• The company has started reporting aluminium pot relining expenses below EBITDA since Q4FY18. This inflates EBITDA by ~US$30/t. Despite that, we are positively surprised by aluminium profitability. It reported EBITDA/t of US$424 in Q1FY19 v/s US$297 in Q4FY18, aided by higher aluminium realisation (up US$105/t qoq to US$2,428/t) and control on its costs (down US$22/t qoq to US$2,004/t).
• Its copper business was adversely affected (EBITDA loss of Rs870m) due to shutdown of its Tuticorin plant while international zinc operation EBITDA was adversely affected (EBITDA of Rs850m, down  67% qoq) due to maintenance shutdown of the plant leading to lower volume and higher CoP.
• The absence of one off benefits of Rs1.5bn in Q4FY18 and consistent plant availability of Talwandi Sabo power plant (91% v/s 93% in Q4FY18) helped power to record EBITDA of Rs4.25bn, down 29% qoq. The higher profits from pig iron offset part of decline in iron ore volume from Goa.  It reported EBITDA of Rs370m from steel business.
• At Q1FY19-end, Net debt ex-HZ was Rs512bn, up 16% qoq due to Electrosteel steel acquisition and higher working capital requirement.

Key Positives: Higher oil prices, improved aluminium profitability.

Key Negatives: Higher CoP of International zinc, shutdown of copper smelter; increase in net debt.

Upgrade to Outperformer with TP of Rs279

VEDL’s FY19 EBITDA estimate is largely unchanged with higher profits from oil & gas and aluminium businesses offset by lower profits from zinc. We expect VEDL to record EBITDA CAGR of 15% over FY18-20E. With sharp fall in share price, we upgrade the stock from Neutral to Outperformer. We value it on FY20E SoTP basis and arrive at a TP of Rs279. Key risk: Approx 3% of VEDL’s shares is with Indian Income tax authority which may be sold in the open market restricting upward move in the stock.