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Earnings to improve; YTDFY23 DPS at Rs81

VEDL reported higher-than-expected adjusted EBITDA of Rs70.7bn (CentrumE: Rs63.2bn) down 2% QoQ, primarily due to decline in commodity prices. Except of oil & gas, power and aluminium, rest segments reported sequential lower EBITDA. The hedging of commodity at higher prices helped VEDL to record gain of ~Rs4.75bn in Q2FY23 (vs 17bn in Q2FY23). Ex-Hindustan Zinc (HZ), adj EBITDA was Rs35.3bn, up 10% QoQ. Management guides power cost to go down in Q4FY23, benefitting from higher linkage coal and commissioning of Jamkhani mine. Beside, we expect higher commodity prices and cost efficiency to improve profitability. Board has approved sale of International Zinc at USD2.98bn to subsidiary HZ. It has announced Rs12.5/sh, totalling Rs81/sh YTD. Along with lowering of FY23E/FY24E estimates, we roll over our valuation to mid-FY25E. We value VEDL at 4.5x average of FY24E/FY25E EV/EBITDA exHZ and add value of VEDL’s share in HZ (6.5x EV/EBITDA) to arrive at a TP of Rs404 (earlier Rs407). Reiterate BUY. Adj EBITDA ex-HZ up 10% QoQ, driven by lower CoP

Adj EBITDA ex-HZ up 10% QoQ, driven by lower CoP

Aluminium and oil & gas contributed ~84% to EBITDA ex-HZ (71% in Q1FY23). During Q3FY23, VEDL’s aluminium segment witnessed decrease in power cost (down 27% QoQ) on account of higher supply of linkage coal. The share stood at 66% vs 55% in Q2FY23. Overall CoP fell by 10% QoQ to USD2,340/t. Aluminium price adjusted to hedging gain was down USD193/t QoQ. The overall EBITDA/t increase by USD42 QoQ to USD208/t and EBITDA of Rs9.6bn, up 27% QoQ (27% share in EBITDA ex-HZ). Oil & Gas segment (57% share in EBITDA ex-HZ) reported EBITDA of Rs20bn up 33% QoQ as Q2 was impacted by extra excise duty of Rs5.2bn. Increase in oil prices was offset by reduction in special exise duty, while operating cost stood flat QoQ(USD13.6/boe against USD13.5/boe in Q2FY23) and higher volume (up 3% QoQ to 145kboepd). International zinc posted EBITDA of INR3bn, down 48% QoQ as effect of lower zinc prices.

YTDFY23 dividend of Rs81/sh; expect DPS of ~Rs 50 in FY24

Parent company, Vedanta Resources has debt obligation of USD3bn in FY23. It repaid ~USD1.7bn in YTDFY23 to USD8bn. VEDL announced, the fourth interim DPS of Rs12.5, taking total DPS to Rs81 year till date. Additionally has annual brand fee of USD0.2bn. The proposed sale of Zinc International at USD2.98bn to HZ is beneficial to VEDL, as the proceeds thereof would help VRL to meet deleveraging goals. VRL has debt obligation of USD2bn in Q1FY24. We do not expect any further dividend in FY23 from VEDL but factor in DPS of Rs50 in FY24E and DPS od Rs45 in FY25E. At Q3FY23-end, net debt ex-HZ increased by Rs16bn QoQ to Rs494.5bn

Available at a div yield of 16%; reiterate BUY

The commodity prices bounced back in anticipation of China reopening from covid restrictions. The benefit of cost savings in aluminium via 3mtpa alumina expansion in FY24 and usage of captive coal would reduce CoP structurally. Besides, a 16% dividend yield makes the stock attractive; We factor in DPS of Rs50 and Rs45 in FY24 and FY25 (div yield of 16%). We recommend BUY with a TP of Rs404

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