Coal shortage impacts AL and power segments; Zinc outlook remains bullish; Raising target price and maintaining Buy
* Cons. EBITDA increased 21% YoY to INR56.7b (5% miss v/s our est. of INR60b), driven by strong growth in zinc. O&G and copper (Cu) too reported strong numbers. Aluminum and power missed our estimates due to shortage of coal and the ash dyke breach incident at Jharsuguda. Iron ore business was subdued due to seasonal factors.
* Zinc: HZL numbers were in-line. Zinc-int reported strong numbers, driven by robust production and a significant reduction in cost of production (CoP).
* Cu: EBITDA improved 71% QoQ on operating leverage, driven by 17% volume growth and better TcRc.
* O&G: Discount to Brent Index widened to 13.4% (v/s 9.5%). Rajasthan production and capex are expected to ramp-up in 2HFY18. n AL production ramp-up remains on schedule, but the 2HFY18 guidance for CoP is raised again to USD1,850-1,900 (v/s USD1600/t earlier) due to shortage of domestic coal and rising input costs.
* Zinc price outlook remains bullish. We are raising LME assumption by USD400 to USD3,800/t. Gamsberg project development too is progressing well and will start contributing to volumes in FY19E. Rajasthan oil production is expected to be 2-3% higher YoY at 165kboepd in FY18, which implies strong ramp-up in the second half.
* Valuation and view: Vedanta (VEDL) has a portfolio of high-quality base metals and O&G assets, and is well poised to benefit from the bullish price outlook for zinc. We raise our target price to INR394 (prior: 358), led by increasing zinc price assumption.
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