Vedanta's Q4FY19 results (Neutral) - Volume to boost earnings
Q4FY19 Result Highlights: in-line operating results
- Vedanta (VEDL IN) reported in-line EBITDA of Rs61.4b (IDFCe: Rs60.0bn), up 8.7% qoq due to higher profits from zinc international (higher prices, volume and lower CoP), aluminium (lower CoP offsetting lower volume & prices), iron ore (higher volume) & steel business (higher volume, lower CoP offsetting lower steel prices). Major segments like Zinc India and Oil & gas reported lower EBITDA due to lower volume in zinc and lower oil prices. Though aluminium CoP declined 7% qoq to US$1,879/t but higher than our CoP estimates of US$1,814/t in Q4.
- VEDL informs that its proposed investment of ~Rs38.1bn in buying economic interest in a structured investment in Anglo American Plc from its parent company, Volcan has a put option which ensures minimum realisation of Rs41.9bn, thus no risk to its investment.
- At Q4FY19-end, Net debt ex-HZ (excluding acceptances) was surprisingly down Rs81.5bn (16%) qoq to Rs439bn when EBITDA ex-HZ was Rs33.6bn during Q4FY19.
Key Positives: lower CoP of aluminium, international zinc and steel, start of Gamsberg mine
Key Negatives: lower oil prices, lower volume in Zinc India & aluminium
Change in estimates: Cut EBITDA estimates by 3% in FY20 and by 6% in FY21 to factor in lower zinc and oil volumes
View: Reiterate Neutral with revised TP of Rs201
Volume growth and cost control will be the mantra for VEDL in FY20. We expect Vedanta to record EBITDA growth of ~29% yoy in FY20E driven by volume growth in zinc (both India and International), and oil & gas, and lower CoP of aluminium. We cut FY20 EBITDA estimates by 3% to factor in lower zinc and oil volumes. As a result, we revise downward our target price to Rs201 (earlier Rs213) based on FY20E SOTP. We expect DPS of Rs17 in FY20 which works out to 10% div yield at CMP. Higher dividend is essential to meet the interest obligation of the parent company, Vedanta Resources. However, risk remains for VEDL as the parent company has ~USD6.3bn debt (Rs120/sh of VEDL) which needs to be paid in future and it does not has any corresponding major operating entity besides VEDL which can help in repaying the debt. We reiterate Neutral rating on the stock.
Vedanta is diversified natural resources company. Co.'s business is principally located in India. Co. maintains operations in Australia, United Arab Emirates, South Africa, Namibia and Ireland. Co. is primarily engaged in zinc, oil and gas, iron ore, copper, aluminium and commercial power generation businesses and is also developing and operating port operation businesses and infrastructure assets. Co.'s operations are organized along four business divisions: Zinc (fully-integrated zinc business operated by HZL); Oil & Gas (domestic oil production through Cairn India); Iron Ore; Copper (custom smelting); Aluminum (Balco); and Power (multiple power plants across locations in India).
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