Vedanta's Q3FY18 results (Outperformer) - Higher volume, prices to drive earnings
Q3FY18 Result Highlights: Allround improvement; copper drags
- Vedanta (VEDL IN)’s EBITDA ex-HZ stood at Rs35.2bn, up 33% qoq (8% higher than IDFCe). The better than expected results is due to improved performance in iron ore and power division. The beneficiation of iron ore yielded good results in Goa fetching higher realisation while 97% availability at Talwandi Sabo boosts power profits. In aluminium, the volume ramp up and higher prices offset higher CoP. All segments recorded qoq growth in EBITDA except copper which was hit by lower Tc/Rc margins and higher CoP.
- Aluminium EBITDA, at Rs6.1bn (EBITDA/t of US$224, up 6% qoq), was up 33% qoq due to high volume (up 16% qoq to 440kt) and prices (up 4% qoq to US$2,249/t) which more than offset high CoP (up 4% qoq to US$2,025/t). CoP is expected to fall by 3% qoq in Q4FY18E due to better availability of coal.
- The 1,980MW power plant at Talwandi Sabo operated at an availability of 97% v/s 87% in Q2FY18. This helps improving power profits (EBITDA of Rs5.95bn v/s Rs3.7bn in Q2).
- The beneficiation of iron ore in Goa and higher volume helped VEDL record EBITDA of Rs2.3bn v/s loss of Rs40m in Q2. Zinc International’s EBITDA was 15% qoq higher due to higher zinc prices.
- At Q3FY18-end, Net debt ex-HZ (incl buyers’ credit) was Rs475bn, up 1% qoq.
Key Positives: Higher iron ore and power profits, higher aluminium volume
Key Negatives: Higher aluminium CoP, lower volume in oil&gas
Impact on financials: Reduce FY18 EBITDA by 3% to factor in higher aluminium CoP; introduce FY20E estimates
Valuation- recommend Outperformer with a TP of Rs353
The ramp up of aluminium volume and high prices is expected to offset high CoP. We expect VEDL to record EBITDA CAGR of 18% over FY17-20E. The company has announced restart of capex (copper cathode capacity by 400ktpa) and possibility of alumina expansion (from 2mtpa to 4mtpa) along with expansion in oil & gas which will not allow any major deleveraging of the balance sheet. We rollover and value it on FY20E SoTP basis and arrive at a TP of Rs353.
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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