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MOSL: VEDANTA (Neutral)-Aluminum business turning around

Vedanta: Aluminum business turning around

(VEDL IN, Mkt Cap USD7.2b, CMP INR138, TP INR142, 3% Upside, Neutral)

 

Production ramp-up key monitorable; sharp price correction worrying

• Vedanta's (VEDL) 3QFY20 results reflect the gains from the ongoing structural cost reduction in the aluminum business. The next leg of growth is now dependent on the success of the guided production ramp-up in the oil & gas and zinc businesses.
• The sharp recent correction in commodity prices due to demand worries on the coronavirus outbreak does not bode well for the near-term earnings outlook. We maintain our FY20/FY21 estimates and Neutral rating. 

Lower CoP in aluminum biz drives beat

• EBITDA of INR52b (+18% QoQ) was above our estimate of INR48b (9% beat) due to lower cost of production (CoP) in the aluminum business. Adj. PAT more than doubled to INR13.6b QoQ given the turnaround in aluminum operations. Reported PAT was higher at INR23.6b due to INR12.8b one-off gain for its oil & gas business.
• Aluminum business rebounded strongly with EBITDA of INR8b (v/s loss of INR1.1b in 2QFY20) on lower coal costs and higher alumina production. CoP was down 9% QoQ to USD1,691/t.
• Oil & gas witnessed one-off gain of INR12.8b on allowance of cost recovery for exploration capex (incurred over FY2015-19). Adj. for this, EBITDA was down 18% QoQ to INR14.9b on lower volumes and prices.
• Zinc International's EBITDA decreased 49% QoQ to INR1.1b, led by lower volumes at Skorpion and lower realization. Steel EBITDA stood at INR1.1b (2QFY20 - INR0.2b) on higher volumes and better margins. Hindustan Zinc had reported an EBITDA of ~INR22.9b.