Vedanta Rating: neutral; weak commodity prices impacted Q1

Vedanta’s (VEDL’s) Q1FY21 results reflect the impact of weak commodity prices as Ebitda declined 12% q-o-q to Rs 39.9 bn. However, Ebitda beat estimates led by higher profitability in aluminum business. All eyes are now on the proposed delisting of VEDL by the promoters and the reverse book-building for the same started on 5th Oct’20 and will be open till 9th Oct’20. The final outcome on the success or failure of the delisting would be known on 16th Oct’20. Maintain Neutral.

Aluminum business offsets weakness in zinc and Oil & Gas (O&G): Q1FY21 Ebitda declined ~12% q-o-q due to a sharp plunge in commodity prices. However, it was above our expectations of Rs 29.9 bn due to higher profitability in aluminum business (Ebitda of Rs 13.0 bn v/s est. Rs 6.2 bn). The company benefitted from reduction in renewal power purchase obligation (RPO) to the extent of Rs 3.95 bn. Adj. PAT, however, grew 30% q-o-q to Rs 10.3 bn due to higher other income (higher marked to market gains) and lower depreciation (due to impairment of book value in O&G business done in Q4FY20).

The share of Ebitda from Hindustan Zinc (HZL) and O&G businesses (at Rs 20.7 bn) declined to 52% (v/s 62% in Q4FY20), the lowest in the last four years. This was largely due to lower commodity prices. The O&G segment reported Ebitda of Rs 4.9 bn (down 43% q-o-q/73% y-o-y), primarily due to lower oil prices (down 37% q-o-q). HZL had earlier reported Ebitda of Rs 15.8 bn, down 20% q-o-q, primarily due to lower zinc prices.

Aluminum business’ Ebitda surprised with 15% q-o-q growth despite a ~12% plunge in aluminum prices sequentially. This was due to the sharp reduction in hot-metal cost of production (CoP) to $1,268/t (-12% q-o-q), supported by lower coal and alumina cost.

Net debt surged Rs 35 bn q-o-q to Rs 248 bn due to dividend payment by HZL and higher working capital. Cash and cash equivalents stood at Rs 338 bn. VEDL through its overseas subsidiaries has lent $307 m to its parent Vedanta Resources (VRL) and other promoter group entities, which is repayable by Jun’21. Management expects 10-year extension of the profit-sharing contract (PSC) for its O&G block RJ-ON-90/1 in Rajasthan to be on existing terms (i.e. at 40% profit sharing). The government, however, is demanding an increase of 10% in the profit sharing to grant an extension. The matter is under litigation and is due for hearing on 16th Oct’20.

Valuation and view
We have factored in the post-COVID recovery in commodity prices in our estimates. VEDL’s cost reduction in aluminum, zinc capacity expansion completion and expected ramp-up in O&G should also support FY22e earnings growth. Over FY20-22e we estimate CAGR of 11% in Ebitda and 28% in EPS. Loan extension of $307 m to its promoter group entities highlights the stretched balance sheet of the promoter. We value VEDL on SOTP basis to arrive at a TP of Rs 148.