Published on 15/07/2017 1:32:39 PM | Source: Motilal Oswal Securities Ltd

Buy Vedanta Ltd For Target Rs.311.00 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report | #Vedanta #Mining Sector #Broking Firm Views Report #Motilal Oswal


Oil & ali volumes, tight zinc supply driving upgrades

Raising estimates and upgrading to Buy

Oil & gas: More production has become viable, raising volumes and DCF

* We recently attended Vedanta’s (VEDL) Oil & Gas Day, which made us bullish on the company’s prospects, as it has crushed opex/capex aggressively, making ASP EOR, RDG gas and tight O&G viable even at low Brent price of USD40/bbl.

* Impressed by VEDL’s zest for more resource and commitment to exploit the huge potential in the Rajasthan block, we have raised volumes estimates for the next 10-20 years, which has more than doubled the DCF valuations.

 

Zinc: Supply tightness to continue, raising price assumption

* Zinc concentrate supply is tighter than our expectations. Glencore too has kept away from opening 500ktpa mothballed capacity, despite a rally in zinc prices. On the other hand, demand growth has been strong, which augurs well for zinc prices. We are raising LME assumptions from USD2,800 to USD3,200/t.

 

Aluminum: Raising volumes estimate given strong guidance on smelter ramp-up

* We have upgraded aluminum volumes estimate by 17% to 2.0mt in FY19E post the company guiding that the three new smelters at Jharsuguda will achieve full ramp-up by 3QFY18E, assuming no further pot outage.

 

Annual Report Analysis: Underlying net debt understated in 4QFY17 presentation

* The annual report FY17 restated balance sheet for the previous two years, assuming the merger with Cairn India with effect from 31 March 2015. This gives a good picture to understand the financials of the merged company.

* Shareholders were rewarded liberally, led by strong free cash flows. However, underlying net debt is INR287b higher than that reported in the 4QFY17 presentation.

 

Raising estimates and upgrading to Buy

* On upgrade in volumes (O&G and aluminum) and zinc prices, consolidated EBITDA is raised by 16% to INR318b in FY19E.

* We have toned down the valuation multiple from 7x to 6.5x EV/EBITDA (to align with peers) because we now factor in full volume potential and optimistic zinc prices. As a combined effect, the target price has increased 32% to INR311/share on the basis of FY19E SOTP, implying 18% upside.

* VEDL has now stated a clear dividend policy of minimum 30% payout. It has also started stating that parent debt will be serviced by dividend payouts. We are modeling 38% payout. This may lead to USD281m dividend payout to the parent. A higher payout is possible as this may not be sufficient to service debt. This has reduced concerns about capital misallocation.

* The stock has been re-rated on higher dividend payout, volume growth and strong balance sheet. We are upgrading VEDL to Buy.

* EBITDA of Hindustan Zinc (HZL) is raised by 11-21% over FY18-20E on upgrade to the zinc price estimate. Value multiple is toned down to 6.5x. The revised target price is INR301/share. We upgrade HZL to Neutral.

 

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