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Growth available at 11% dividend yield

Vedanta (VEDL IN) reported in-line adjusted EBITDA of Rs99.7bn, up 10% QoQ (CentrumE: Rs99.6bn). The outperformance in aluminum, international zinc and iron ore was offset by underperformance in Zinc India and oil & gas. Ex-HZ, EBITDA was Rs64.6bn, up 24% QoQ (4th consecutive QoQ increase) due to higher commodity prices. We revise our FY22E/FY23E EBITDA by 3%/6% to factor in higher zinc and aluminum prices, partly offset by lower volume in oil & gas and higher profit sharing by the government. We increase our FY22/FY23 DPS to Rs30 from Rs18 earlier, as VEDL intends to reduce leverage of the parent company, Vedanta Resources (VRL). Despite increase in EBITDA estimates, our equity target price is revised downwards to Rs388 (earlier Rs402), based on FY23E SoTP. Reiterate BUY.

EBITDA ex-Hindustan Zinc was up 24% QoQ, driven by aluminum, international zinc

About 80% of incremental EBITDA ex-HZ was contributed by aluminum (58% share in EBITDA ex-HZ) and ~16% by international zinc. Power earnings returned to normal in Q1FY22. Aluminum reported adj. EBITDA of Rs37.3bn, up 36% QoQ due to higher aluminum prices (up 14%, i.e. USD316/t QoQ). Volume was down 2% QoQ to 533kt. The higher earnings were partially offset by higher alumina and other manufacturing cost, which in turn increased CoP by USD56/t QoQ to USD1,590/t. As a result, EBITDA/t stood at USD952, up USD260/t QoQ. High zinc prices and volume coupled with lower cost inflated international zinc EBITDA 2x QoQ to Rs4bn. Oil & Gas segment (17% share in EBITDA ex-HZ) reported EBITDA of Rs10.6bn, flat QoQ despite ~13% QoQ increase in Brent prices and lower operating cost (down to USD8.4/boe vs USD9/boe) due to higher maintenance activities in Q4FY21. This was due to increase in profit sharing by ~10% by the government.

Net debt falls due to partial repayment by parent; high dividend payout likely in FY22

At Q1FY22-end, net debt ex-HZ (excluding capital acceptances) declined Rs20bn QoQ to Rs375bn primarily due to debt repayment of ~Rs15bn by the parent company, VRL out of total ICD of Rs70.65bn. In order to save on taxes on dividend paid by HZ in FY21, VEDL has to pay dividend of ~Rs18/share before 31 October 2021. Moreover, as management’s focus is to reduce debt of parent company, we can expect much higher dividend from VEDL. We increase our FY22/FY23E DPS to Rs30 (earlier Rs18).

Inexpensive valuation; reiterate BUY with TP of Rs388

High commodity prices will help VEDL to generate EBITDA CAGR of 26% during FY21-23E, which provides comfort of paying higher dividend to support the parent company’s debt. The promoter’s intent to raise its stake (raised from 50% to 65% in last one year) further, which ultimately may result in delisting of shares, will keep interest alive in the stock. Despite increase in EBITDA, due to expectation of higher dividend (Rs30 in each of FY22/FY23 from Rs18 expected earlier), our target price is revised to Rs388 (earlier Rs402) based on FY23E SoTP. Reiterate BUY.

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