We expect Vedanta to benefit from cost control at aluminium (Al) division and higher volumes at oil & gas division in FY20, despite lower base metal prices, due to: 1) Q1FY20 hot metal cost expected at INR1,700-1,750/t compared to USD1,935/t in Q1FY18 and USD1,776/t in Q4FY19; and 2) 15koepd additional volume Q2FY20 onwards from commissioning of the RDG early gas facility. Additionally, integration of shaft at SK mine will add 3.75mtpa of hauling capacity, thus boosting the mine’s capacity to 6mtpa. On the flip side, lower LME zinc and steel prices are expected to keep performance muted. Maintain ‘HOLD’ with TP of INR175/share. The stock is currently trading at 3.8x FY21E EBITDA.
We view the related-party transaction between Volcan Resources (Volcan) and Vedanta (VEDL) as imprudent capital allocation as it: 1) neither confers voting rights nor ownership of underlying Anglo American (AAL) shares to VEDL shareholders; 2) amounts to VEDL shareholders funding the ultimate parent; and 3) raises concerns on further relatedparty transactions in the future given that VEDL is the major cashgenerating entity in the group. In this light, we are pruning the target multiples for all divisions (except Zinc-India and Oil & Gas) by 30%, discounting cash ex-Zinc India by 25% and raising conglomerate discount to 35% (from 20%). Maintain ‘BUY/SO’ with a revised TP of INR175 (versus INR250 earlier), implying an exit multiple of 4.6x FY21E EBITDA.
Challenging operating environment to sustain; downgrade to SELL... Vedanta’s earnings remain sensitive to nonferrous and crude oil prices. Nonferrous prices have witnessed volatility and declined primarily on account of uncertainty over global trade due to trade friction between the US and China. Crude oil prices have also witnessed a declining trend from November 2018, which would have a negative impact on the company’s future earnings. We value the stock on an SOTP basis and arrive at a target price of | 145 with a SELL rating on the stock.