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Higher power cost hit EBITDA

VEDL reported lower-than-expected adjusted EBITDA of Rs107.4bn, down 22% QoQ (CentrumE: Rs114.6bn), primarily due to lower profits from aluminium segment (higher CoP due to power cost, lower LME aluminium prices), partially offset by higher profits from Zinc and oil. The hedging of commodity prices at higher prices helped VEDL to record gain of ~Rs7.64bn in Q1FY23. Ex-Hindustan Zinc (HZ), adj EBITDA was Rs56.0bn, down 36% QoQ. Management guides power cost to have peaked out in Q1FY23 and with lower alumina price and higher volume (28% v/s 20% in Q1FY23) hedged at USD3,630/t, profitability of aluminium segment will improve in Q2FY23 despite lower LME aluminium prices. Net debt ex-HZ increased by 24% QoQ to Rs482bn due to dividend pay-out of Rs116.8bn in Q1FY23. VEDL leveraged standalone balance sheet to pay dividend. We value VEDL on FY24 earnings and arrive at a TP at Rs405, valuing VEDL at 4.5x FY24E EV/EBITDA ex-HZ (Rs203) and add value of VEDL’s share in HZ (6.5x EV/EBITDA and 15% holding company discount). Reiterate BUY.

Adj EBITDA ex-HZ down 36% QoQ, driven by higher power cost and lower aluminium prices

Aluminium and oil & gas contributed ~77% to EBITDA ex-HZ (83% in Q4FY22). During Q1FY23, VEDL’s aluminium segment witnessed sharp increase in power cost as it received lower quantity of linkage coal and had to purchase power as well as imported coal too. Other RM cost was on a rise, inflating overall CoP by 18% QoQ to USD2,763/t. Lower aluminium prices (down USD237/t QoQ despite hedging gain of USD165/t as it hedged 20% of volume at USD3,500/t+) and higher CoP led EBITDA/t to decline by USD657 QoQ to USD527/t and EBITDA of Rs22.5bn, down 57% QoQ (40% share in EBITDA ex-HZ). Oil & Gas segment (33% share in EBITDA ex-HZ) reported EBITDA of Rs20.8bn, up 1.4% QoQ despite increase of ~15% QoQ increase in oil prices, offset by higher operating cost (increased to USD13/boe from USD12.5/boe in Q4FY22 due to increase in polymer prices) and lower volume (down 4% QoQ to 148kboepd). CoP increased further at international Zinc, offsetting pricing gain. Power profits remains tepid and fell 55% QoQ as profits from TSPL was offset by losses at Balco’s power as plants were shut there. Thus, EBITDA ex-HZ was down 36% QoQ to Rs56.0bn.

Paid 2nd interim div of Rs19.5/sh, totalling div of Rs51/sh; expect DPS of ~Rs 45 in FY24

VEDL’s parent company, Vedanta Resources (VRL) has net debt of ~USD7.9bn at Q1FY23-end. VRL needs to repay the term debt of USD2.7bn in FY23 (repaid USD1bn in Q1FY23 and USD0.5bn to be repaid in July) and another USD3bn in FY24. Earlier Management guides debt reduction of ~USD4bn in next three years to ~USD5bn. VEDL has provided two interim dividend so far, totalling Rs51/sh, entailing cash outflow of Rs189.3bn. As VRL holds 69.7% stake, it received Rs132.2bn (~USD1.7bn) which is being utilised to repay the bonds due in July 2022 and some bank term debt. We do not expect any further dividend in FY23 from VEDL but factor in DPS of Rs45 in FY24. At Q1FY23-end, net debt ex-HZ increased by Rs92.9bn QoQ to Rs482bn due to dividend payment.

Available at a div yield of 18%; reiterate BUY

The supply crunch is expected to offset demand slowdown and cost support should keep Zinc and aluminium prices relatively higher than historical average. Though FY23 EBITDA is expected to fall by 12% YoY to Rs396bn due to higher CoP in aluminium and zinc but it still remains high compared to historical earnings (average FY17-21 EBITDA of Rs235bn). The benefits of cost saving in aluminium via higher linkage coal in Q2FY23, 3mtpa alumina expansion by FY23-end, aluminium expansion at Balco and usage of captive coal will (2 mines to start mining by Q3FY23) start from FY24 onwards, providing mid-term visibility of earnings growth. We factor in DPS of Rs45 in FY24 (div yield of 18%). We recommend BUY with a TP of Rs405.

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