Vedanta Rating: Neutral; Poor quarter amid big uncertainties

Metals and mining major Vedanta’s consolidated net sales stood at Rs 36,600 crore, 6% ahead of our estimates of Rs 34,500 crore. The improved sales was driven by higher sales volume, strategic hedging gains, and foreign exchange gains, which was partially offset by lower commodity prices.

The consolidated Ebitda stood at Rs 7,700 crore, which is marginally lower than our estimates of Rs 8,000 crore. The miss in Ebitda is mainly attributed to Ebitda miss in the aluminum business. The zinc India business Ebitda at Rs 4,400 crore was in line with our estimates of Rs 4,200 crore. However, the other major segment viz., oil and gas business beat our estimate of Rs 1,900 crore by 8% with an Ebitda of Rs 2,000 crore.

LME prices continued to drift down through the quarter both on a q-o-q as well as on a y-o-y basis.

Copper/aluminum/zinc/nickel/alumina were down on a q-o-q basis with lead being the exception. Lead was marginally up 2% q-o-q.

The company had unwound its hedges of 28% zinc, 34% aluminum, and 33% oil (gross basis) at more than $4,100/t, $3,600/t, and $100/bbl, respectively, for Q2FY23, with total hedging gains at Rs 17 bn.

On a q-o-q basis, sales volumes of lead/silver/aluminum/power and steel rose 6%/11%/ 4%/3%/6% /6%, while zinc were down 8%.

Coal linkage for aluminum business rebounded to 55%, after declining to 22% in Q1 from a high of 63% in Q4FY23. However, since the coal was transported through the trucking route, the transportation costs partly offset the benefit of FSA pricing. While Vedanta continues to focus on the debt and cost management, the challenging macro environment globally is likely to weigh on any improvement in LME prices.  With a bearish outlook on metal prices and with a possibility of a ban leading to a run up, we reiterate our Neutral rating on VED as we believe the stock is fully valued in the current environment. We keep our SoTP-based TP unchanged at Rs 255.