MSOL: VEDANTA (Buy)-Miss across businesses; zinc and oil production growth ahead

Vedanta: Miss across businesses; zinc and oil production growth ahead; Brace for LME and alumina squeeze for Aluminum; Maintain Buy

(VEDL IN, Mkt Cap USD12.0b, CMP INR222, TP INR269, 21% Upside, Buy)

Vedanta’s (VEDL) 1QFY19 EBITDA declined 20% QoQ (+29% YoY) to INR62.8b, missing our estimate by 8% due to lower-than-expected volumes and higher-than-expected cost at Zinc-India, Zinc-Int and O&G, partially offset by a stronger performance at aluminum and iron ore. Finance cost inched up led by rising debt for Electrosteel acquisition and winding down of low-cost financing under the revised RBI guidelines. DDA inched up due to w/back of impairments last year. Adj. PAT declined 33% QoQ to INR15.3b (est. of INR17.6b).

• Copper and iron ore businesses in Goa are facing regulatory uncertainty. Iron ore mining allocation in Karnataka has doubled to 4.5mt.
• Gamsberg project is delayed by a quarter to September 2018. Zinc production is expected increase significantly in 2HFY19, both in India and Africa. Cost of production at Zinc-Int remains high so far.
• Aluminum business is likely to somewhat benefit from improved availability of bauxite and coal locally in Odisha, but weaker LME and stronger alumina prices of imports (60-70% dependence) will hurt margins.
• O&G production guidance of 220-250k bpd remains unchanged, but ramp-up so far has been gradual, while cost of production has inched up. High oil prices are a tailwind. We see downside risk to the volume guidance.