MOSL: VEDANTA (Upgrade to Buy)- Oil & ali volumes, tight zinc supply driving upgrades-Raising estimates

​VEDANTA: Oil & ali volumes, tight zinc supply driving upgrades; Raising estimates and upgrading to Buy

(VEDL IN, Mkt Cap USD15.1b, CMP INR263, TP INR311, 18% Upside, Upgrade to Buy)

Oil & gas: More production has become viable, raising volumes and DCF

• ​We recently attended Vedanta’s (VEDL) Oil & Gas Day, which made us bullish on the company’s prospects, as it has crushed opex/capex aggressively, making ASP EOR, RDG gas and tight O&G viable even at low Brent price of USD40/bbl.
  
• Impressed by VEDL’s zest for more resource and commitment to exploit the huge potential in the Rajasthan block, we have raised volumes estimates for the next 10-20 years, which has more than doubled the DCF valuations.
  

Zinc: Supply tightness to continue, raising price assumption

• Zinc concentrate supply is tighter than our expectations. Glencore too has kept away from opening 500ktpa mothballed capacity, despite a rally in zinc prices. On the other hand, demand growth has been strong, which augurs well for zinc prices. We are raising LME assumptions from USD2,800 to USD3,200/t.
  
• ​Aluminum: Raising volumes estimate given strong guidance on smelter ramp-up
  

We have upgraded aluminum volumes estimate by 17% to 2.0mt in FY19E post the company guiding that the three new smelters at Jharsuguda will achieve full ramp-up by 3QFY18E, assuming no further pot outage.