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MOSL: VEDANTA (Buy)-Aluminum margins collapse-large dividend announced; O&G volume guidance reduced

Vedanta: Aluminum margins collapse; large dividend announced; O&G volume guidance reduced; Maintain Buy

(vedl IN, Mkt Cap USD10.6b, CMP INR211, TP INR243, 15% Upside, Buy)

 

• Vedanta’s (VEDL) 2QFY19 EBITDA declined 17% QoQ (-8% YoY) to INR52b, missing our estimates by 9% due to a subdued performance across segments, except Zinc-India. DDA was up 8% QoQ, led by higher mine production. Finance cost, too, inched up, led by higher interest rates and increased borrowings. Adj. PAT fell 33% QoQ to INR10.2b (our estimate: IRN13.3b). VEDL declared a large dividend of INR17/share (8.2% yield).
• Copper segment has avoided EBITDA loss, as rod mill covered fixed costs.
• Iron ore: EBITDA nearly halved on discontinuance of Goa mining.
• Aluminum production inched up marginally, but EBITDA/t collapsed more than expected by USD286/t (LME was down USD201 LME) QoQ to USD119/t (our estimate: USD169) on account of higher alumina and power cost.
• O&G: FY19 volume guidance is reduced by 15% due to the delay in projects. VEDL has secured extension of PSC for Rajasthan block by another 10 years and 41 blocks for exploration under OALP policy.
• VEDL has a portfolio of high-quality base metals and O&G assets. Zinc and oil prices have lost momentum. Zinc & Oil account for ~80% value of the company. Zinc businesses should deliver strong volume growth on start of Gamsberg mine in Africa and completion of expansion projects in India. Power business remains stable, while aluminum, copper and iron ore segments are struggling.