Vedanta's Q2FY19 results (Outperformer) - Lower metal prices drags profits

Q2FY19 Result Highlights:

Aluminium faces headwinds both in realisations and costs

Vedanta (VEDL IN) reported in-line adjusted EBITDA of Rs53.4bn, down 18% qoq (1.6% lower than IDFCe) due to lower profits from aluminium and zinc businesses on account of higher CoP and lower realisation.

• EBITDA at Zinc India (HZ) stood at Rs 23.3bn, down 14% qoq and blended EBITDA/t of US$1,595, down 17% qoq due to lower zinc prices (-13% qoq).
• Oil & Gas Segment reported a 9.4% qoq growth in EBITDA to Rs20.3bn driven by growth in net oil realization to US$69.5/bbl (v/s 67.2in Q1FY19)
• Aluminium segment EBITDA declined 68% qoq to 4.0bn. It reported EBITDA/t of US$144 in Q2FY19 v/s US$424 in Q1FY19, dragged due to dual adverse effect of lower aluminium realisation (down US$205/t qoq to US$2,223/t) and higher CoP (up US$75/t qoq to US$2,079/t) due to higher alumina and power costs
• Steel segment reported EBITDA of Rs 1.68bn with EBITDA/t of Rs 6,269/t in its first full quarter of operation. The plant is running at an annualised run rate of 1.2mtpa.
• At Q2FY19-end, Net debt ex-HZ excluding acceptances was Rs497bn, down 3% qoq.

Key Positives: Declared interim DPS of Rs17, Higher oil prices, ramp up in steel plant, reduce Gamsberg zinc CoP guidance to US$800- US$1000/t

Key Negatives: Lowering of volume guidance in Oil and gas (200-220 kboed in H2FY19 vs  250 kbeod earlier), increasing aluminium COP guidance to US$1,950- US$2000/t (earlier US$ 1,725- US$1,775/t), Higher CoP at Zinc International and in aluminium.

Change in estimates: Reduce FY19 EBITDA by 2% and increase FY20 EBITDA by 3% primarily due to higher oil & gas EBITDA, partly offset by lower zinc and aluminium profits

View: Reiterate Outperformer with a target price of Rs275

We expect H2FY19 EBITDA to be ~45% higher than 1HFY19 due to volume growth in zinc, higher crude prices and improved profits from aluminium and iron ore segment. We expect VEDL to record EBITDA CAGR of ~16% over FY18-20E driven by higher zinc volumes in India and overseas, higher crude prices coupled with improved aluminium profitability. We value VEDL on FY20e SOTP basis and arrive at a TP of Rs275 (earlier Rs279), primarily due to higher dividend (Rs 17 interim DPS v/s expectation of Rs14). The Indian income tax authority has sold almost its entire stake in VEDL, removing major overhang on the stock.