Vedanta down 4% after Madras HC stays expansion plans
The Madras High Court passed a ruling today, staying Vedanta’s capacity expansion plans at the Tuticorin plant. This is a blow to the company that was hoping to complete the expansion by Q3FY20.
Protests against its copper plant turned violent yesterday leading to police firing, killing nine protestors. Vedanta’s copper plant in Tuticorin has been closed since March 27 after it had not received clearance from the Tamil Nadu pollution board. The pollution board had rejected Vedanta’s license to continue operations in April, citing that the company had not complied with environmental laws. The Tamil Nadu pollution board has adjourned decision on the plant to June 6.
The company had also planned to double capacity to 800k tonnes of copper cathode.
The domestic copper business of Vedanta had reported a revenue of Rs24,975cr in FY18, on the back of a record production of 403kt copper cathodes. EBITDA for FY18 stood at Rs1,300cr (~5% of consolidated EBITDA). Given the level of public protest surrounding the plant, it seems unlikely that the plant would begin operation in Q1FY19. We estimate that the shutdown of the copper plant would impact consolidated Q1FY19 EBITDA by a little over ~5%. However, the EBITDA margin for the copper segment stood at 5% in FY18. Due to this, the impact of the closure of the copper unit, would affect the fair value of Vedanta by ~5% as well. This is reflected in today’s price decline. Also, the performance of the other divisions of Vedanta remain strong and with the significant expansion in the oil segment, we see this development having limited impact on the long term prospects of the company.
Vedanta would see a revenue CAGR of 14.1% over FY18-20E aided by (1) strong volume growth from the company’s commodity portfolio, and (2) firm global commodity prices. The company would also see its EBITDA margins expand by ~358bps over FY18-20E owing to higher production volumes and firm pricing. We expect PAT CAGR of 35.3% over FY18-20E respectively with an EBITDA margin of 31% in FY20E. The stock is currently trading at 5x FY20E EPS.
Vedanta is a diversified conglomerate with a wide commodity mix covering iron ore, zinc, copper, aluminium, coal, power, oil & gas and others. The company also operates power generation assets in India for both captive consumption as well as commercial generation. Captive power generation capacity stands at 5.1GW. Capacity of Independent Power Projects stands at 3.6GW. The management has given a capex target of $1.5bn for the company in FY19. Vedanta has recently entered the steel business by acquiring Electrosteel Steels for Rs5,320cr. This would help in forward integration of the company’s existing iron ore mines in Karnataka.