Vedanta costs escalate
Vedanta has the following structural positives, i) calibration of capex coupled with a focus on reducing gearing through debt repayments and generating higher free cash flow along with a strong payout policy, ii) gradual ramp-ups at zinc, aluminium and power operations despite constraints such as sporadic outages and the recent cost inflation, iii) steady commodity prices with improved outlook and iv) merger with Cairn India, which has vastly strengthened its capital structure. Despite the earnings cut factored by us post Q1 led by few headwinds on volumes and cost, Vedanta remains well positioned to deliver strong earnings growth and is an ideal bet for investors looking to ride the commodity upcycle through a strong balance sheet entity.
Operational performance subdued: Consolidated EBITDA at Rs 4,870 crore was lower than our estimates by ~11%.
Outlook: Ramp-up of aluminium assets at both VAL and BALCO has been hit by multiple pot outages. The company’s focus on deleveraging and optimising capex remains strong. We have revised our consolidated EBITDA estimates downwards by ~14%/10% for FY18E/19E led by realignment of volumes and costs.