MOSL: VEDANTA (Buy)-Strong operating performance-O&G and HZL capex raised-Uncertainty in copper and iron ore

VEDANTA: Strong operating performance; O&G and HZL capex raised; Uncertainty in copper and iron ore; Maintain Buy

(VEDL IN, Mkt Cap USD16b, CMP INR286, TP INR345, 20% Upside, Buy)

Vedanta's (VEDL) 4QFY18 EBITDA increased 16% QoQ to INR78.4b (est. of INR73b), driven by growth in zinc-India, O&G, copper, aluminum, partially offset by a decline in iron ore and zinc-int. Aluminum EBITDA beat of 69% was largely driven by capitalization of pot line relining expenses. Cost of production (CoP) at zinc-int was much higher at USD1976 than the guidance of USD1700/t due to pre-stripping at Skorpion mine.

Adj. PAT increased 3% QoQ to INR22.8b in 4QFY18. INR8.2b XO income of INR8b (INR70b w/back of O&G impairment - INR23b iron ore impairment on mines closure in Goa - INR2.5b CWIP w/off - INR15b FCTR reclassification from equity to P&L - INR21b tax impact) was included in reported PAT. EBITDA increased by 18% YoY and adj. PAT by 41% to INR79.2b in FY18.

• Aluminum smelters have ramped up to produce 2mt.
• Copper and iron ore businesses are facing regulatory uncertainty.
• Capex has been stepped up from USD1b to USD1.5b for FY19, driven by zinc-India and O&G. Additional capex of USD2.7b (USD2b in O&G and UDS700m in zinc-India) will be incurred over three years to enhance production.
• Zinc businesses remain strong. Zinc-India is on track for 1.2mt in FY20. Zinc-int's Gamsberg 250kt project, too, is on track for production start in mid-2018.

Raising EBITDA, but reducing PAT; Maintain Buy

• We have made changes to our model to account for production loss at copper, higher CoP at zinc-int, higher CoP and LME for aluminum. EBITDA is up 3%, but PAT is reduced by 9% due to higher DDA and tax rates for FY20E.