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Vedanta – Risks to business model persist, as earnings firm up – ICICI Securities

Vedanta has reported in-line Q2FY21 earnings with EBITDA of Rs65bn against Rs62.5bn expected. Through the foreign subsidiary CHIL, Vedanta Ltd has extended intercompany loan to Vedanta Resources (VRL) – amounting to ~US$956mn at a rate of 7% (~US$650mn in Q2FY21). Management clarified this is the upper limit of intercompany loans that will be extended to the promoter entity and the loan amount will gradually reduce as per repayment schedule. Also, all dividend received from Hindustan Zinc need not be upstreamed, as per extant dividend policy and under special circumstances. We maintain REDUCE with revised target price of Rs89/share (Rs120/share earlier). Implied target P/B at target price of Rs89 is 0.8x FY22E and 1x FY20. We have reduced the target P/B (1.3x FY20 earlier). Continuation of the practice of extending intercompany loans warrants higher discount to the target multiple, in our view.

– Cost performance continues to impress in aluminium. Vedanta has been largely able to maintain CoP QoQ, while consolidating on the meaningful cost reductions achieved on a YoY basis. YoY cost reduction has been driven by US$163/te reduction in alumina costs and US$295/te reduction in power costs. Both Jharsuguda and Balco smelters continue to operate in the first quartile of the cost curve.

– Gamsberg production ramp-up prospective. Gamsberg production at 35kte in Q2FY21 is up 38% QoQ. Best ever production of 14kte has been achieved in Sept, ’20. CoP at Gamsberg has been down 6% QoQ due to better recoveries and cost-control measures. Consolidated production continues to inch up for Zinc International (up 33% QoQ), while CoP continues to trend down ~13% YoY. Vedanta has guided 150-160kte of production from Gamsberg in FY21E with costs at US$1200/te; Black Mountain has been guided at 65kte with CoP ex-Gamsberg in FY21E at US$1300/te.

– Oil and gas business continues to focus on delivery of growth projects as production inches up. With gas sales expected to start from Q3FY21, management has guided 170-180kboepd average production in FY21E. FY21E exit is expected to be 190-195kboepd. Majority of FY21E capex is still earmarked for oil and gas business at US$400mn (out of total FY21E capex guidance of US$700mn). The projects pursued are the one expected to increase production over the next two years. Management also expects to maintain low operating expense of US$7/boe achieved in Q2FY21 for full year.

– Maintain REDUCE. Implied P/B at our target price for Vedanta is 1x FY20/0.8x FY22E. Net debt appears manageable in Vedanta Ltd at Rs272bn. Cashflow requirements in the group though will impede earnings driven investment thesis in the name.

Shares of Vedanta Limited was last trading in BSE at Rs.108 as compared to the previous close of Rs. 107.5. The total number of shares traded during the day was 222070 in over 3317 trades.

The stock hit an intraday high of Rs. 108.45 and intraday low of 107.5. The net turnover during the day was Rs. 23989648.

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