Vedanta's Q3FY20 results (Outperformer) - Volume to drive earnings

Q3FY20 Result Highlights: in-line operating profits

• Vedanta (VEDL IN) reported EBITDA of Rs65.1bn. Adj. of one-time cost recovery in Oil & gas business (Rs12.76bn) and reversal of RPO liability in aluminium business (Rs4.6bn), EBITDA stood at Rs47.8bn (IDFCe: Rs48.2bn), up ~8% qoq, primarily due to higher EBITDA in HZ and aluminium offset by lower profitability in oil & gas segment. Ex-HZ, EBITDA stood at Rs25.bn, up 6.2% qoq. Major segments like Zinc and Oil & Gas contributed 81% to EBITDA vs 92% in Q2FY20.
• Oil & Gas segment reported adj EBITDA of Rs14.85bn, down 18% qoq due to 3.4% qoq lower daily average production and ~6% qoq lower realisation due to higher discount to Brent (~9.6% vs 1.3% qoq).
• Aluminium reported adj. EBITDA of Rs3.4bn vs EBITDA loss of Rs1.1bn in Q2FY20 due to lower alumina and power cost. Aluminium CoP stood at US$1,781/t, down 8% qoq.
• Zinc International (ZI) disappointed with EBITDA of Rs1.06bn, down 49% qoq (IDFCe: Rs1.7bn) due to slower ramp up of Gamsberg mine and lower refined zinc volumes (6,000t vs 23,000t) leading to 22% qoq decline in overall volumes to 53,000t. CoP stood flat qoq at US$1,580/t.
• At Q3FY20-end, Net debt ex-HZ (excluding acceptances) increased Rs32bn qoq to Rs429.3bn primarily due to higher working capital.

Key Positives: CoP reduction in Aluminium

Key Negatives: lower volumes in ZI, Oil & Gas; Higher discounts to Brent

Change in estimates: Reduce FY20 EBITDA by 7% to factor in lower commodity prices and lower volume in zinc, oil & gas

Outlook: Reiterate Outperformer with revised TP of Rs177

We expect 40% yoy growth in EBITDA to Rs283bn in FY21e primarily on the back of higher volumes in zinc (both India and International) and Oil & Gas and CoP reduction in aluminium and ZI segments. We do not expect VEDL to provide interim dividend this year, however, can provide final DPS of Rs14/sh (~10% div yield) in FY20. Commodity prices have come under pressure due to demand concerns in China due to outbreak of Coronavirus which could be short term. We expect commodity prices to recover soon. Govt’s stake sale of HZ to VEDL, if happens, could be a trigger for the stock. Any reduction in parent’s debt will be taken as positive by the minority shareholders. Due to cut in numbers, we reduced our target price to Rs177 based on FY21 SOTP. Reiterate outperformer.