Copper Unit Shutdown To Have Limited Impact On Vedanta’s Financials, Say Brokerages

The complete shutdown of Vedanta Ltd.'s copper smelter in Tamil Nadu is likely to have a limited impact on its financials since the business contributes about 5 percent of the company's operating income, according to brokerages.

Vedanta's stock fell 10 percent last week amid protests against the Sterlite Copper plant at Thoothukkudi, Tamil Nadu over environmental concerns. The facility was ordered to be permanently closed yesterday by the state government, a week after police firing killed 13 protesters. Shares of Vedanta traded 3.2 percent lower at Rs 277.85 apiece as of 3:10 p.m.

Copper Unit's Contribution

Copper division's contribution to Vedanta's consolidated earnings before interest, tax, depreciation and amortisation dropped from 7.9 percent to 5.2 percent in the year through March. It's contribution to revenue is higher at 27 percent.

Vedanta, which shut down the plan for planned maintenance in mid-March, couldn't resume production as Tamil Nadu State Pollution Control Board denied renewal of licence citing water and air pollution concerns . The company expected to double the capacity at the plant to 800 kilotonnes by 2019-20 at a capital expenditure of $717 million. Madurai bench of the Madras High Court has stayed the expansion, ANI had reported.

Here's what brokerages had to say on Vedanta post the plant shutdown:

Morgan Stanley

• Morgan Stanley has an ‘Overweight' rating on the stock with a target price of Rs 386.
• Allocated 10 percent of its target price to the copper division for now as “a sense of ambiguity remains”.
• Assuming that the plant is not operational for 2018-19, consolidated Ebitda and PAT (post minority interest for Hindustan Zinc) have downside risks of 4 percent and 7 percent, respectively.
• Given the strong volume growth in aluminum and zinc business, there is a possibility of an upside for the stock
• Near-term sentiment could be weak given lack of clarity on when the plant will restart.

Macquarie

• Maintains ‘Outperform' rating with a target price of Rs 252.70.
• With just 5 percent Ebitda contribution in FY19 estimates, expects limited impact on fair value based on FY20 estimates of enterprise value to Ebitda ratio.
• Didn't rule out a potential de-rating given the uncertainty.

ICICI Securities

• Maintains ‘Buy' rating; lowers target price to Rs 315 from Rs 350 earlier.
• The outcome of the Tamil Nadu Pollution Control Board's hearing and subsequent approval from the Ministry of Environment and Forests will be monitored.
• The stock price will remain volatile in the near term taking cues from these developments.
• Sees an impact of 3-4 percent on Vedanta's consolidated Ebitda in 2019-20 in case of a permanent shutdown of the copper smelter.
• That will lower fair value and earnings per share estimates for 2019-20 by 6 percent.