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MOSL: VEDANTA (Downgrade to Sell)-EBITDA in line, but MTM gains lead to PAT beat-Related-party transaction will de-rate the stock

Vedanta: EBITDA in line, but MTM gains lead to PAT beat; Related-party transaction will de-rate the stock; downgrade to Sell

(VEDL IN, Mkt Cap USD10.3b, CMP INR194, TP INR162, 17% Downside, Downgrade to Sell)

 

• Vedanta’s (VEDL) 3QFY19 EBITDA increased 8% QoQ to INR56.5b (in-line). Zinc-India and Zinc-Int were the key drivers of this growth on higher production and better prices, while aluminum was a drag due to a fall in LME and contraction of premium. Copper smelter remains shut pending resolution of regulatory issues. Iron ore and power were stable, while the steel business improved, led by higher production and margins. O&G disappointed as production declined instead of increasing.
• Finance cost declined on higher capitalization, while DDA increased on higher production. Other income was a major beat due to MTM gains and INR3.5b gains on settlement with a contractor at Balco. PAT was up 54% YoY to INR15.7b (45% beat). For 9MFY19, PAT declined 27% YoY to INR41.3b.
• One of the foreign subsidiaries of VEDL has entered into a related-party transaction with one of the parent entities to invest ~USD500m – equivalent to value of ~25m shares of Anglo-American (ALL) – in a derivative instrument, wherein the value will move with the share price of ALL, while the downside risk is protected. Although this transaction appears at arm’s length, the counter party risk is high because parent drives its value from VEDL itself and is highly leveraged. Investors are now concerned about future allocation of capital, especially from foreign subsidiaries.