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Firm commodity prices keep earnings intact

Vedanta (VEDL IN) reported in-line EBITDA of Rs107.4bn, up 6% QoQ (CentrumE: Rs109.8bn), driven by higher commodity prices, partly offset by higher CoP in aluminium and zinc international. Ex-HZ, EBITDA was Rs63.6bn, down 10% QoQ due to higher aluminum CoP offsetting higher aluminium prices as well as lower iron ore prices. Aluminium CoP is expected to decline due to lower power cost while improved aluminium prices should boost aluminium profitability in Q4FY22. We increase our FY22E/FY23E EBITDA by 4%/6% to factor in higher prices of zinc and aluminum, partly offset by higher CoP in aluminium, international zinc and steel. We marginally increase TP to Rs466 (earlier Rs460), valuing VEDL at 4.5x average of FY23E/FY24E EV/EBITDA ex-HZ (Rs290) and add value of VEDL’s share in HZ (7x EV/EBITDA and 20% holding company discount). Reiterate BUY.

EBITDA ex-HZ down 10% QoQ, driven by higher aluminium CoP

Aluminium and oil & gas remain main contributors and contributed ~81% to EBITDA ex-HZ (84% in Q2FY22). During Q3FY22, VEDL’s aluminium segment witnessed increase in power and alumina cost due to higher purchase of expensive coal (e-auction and imports) and power. Purchased alumina and other RM cost too was on a rise, inflating CoP by 22% QoQ to USD2,125/t. Higher aluminium prices (up 5% QoQ) offset part of cost increase, thereby recording EBITDA/t of USD876 vs USD1,103 in Q2FY22 and EBITDA of Rs37.5bn (58% share in EBITDA ex-HZ), down 19% QoQ. Oil & Gas segment (23% share in EBITDA ex-HZ) reported EBITDA of Rs14.9bn, up 8% QoQ due to ~6% QoQ increase in oil prices, partly offset by higher operating cost (increased to USD10.3/boe from USD9.1/boe in Q2FY22). CoP increased due to higher polymer prices and volume remains tepid (down ~4% QoQ). Higher coking coal affected adversely its iron ore segment while CoP remains high at international Zinc. Power profits too remains tepid. Thus, EBITDA ex-HZ EBITDA was down 10% QoQ to Rs63.6bn.

Net debt increased marginally QoQ; expect high div payment even in FY23

At Q3FY22-end, net debt ex-HZ increased by Rs23.1bn QoQ to Rs418bn due to higher dividend (cash outflow of Rs76.78bn) and increase in working capital. VEDL paid 2nd interim dividend of Rs13.5/share (YTD interim dividend of Rs32/sh) in Q3FY22. We do not expect any further dividend in FY22 but expect Rs30/sh in each of FY23 and FY24. The parent company, Vedanta Resources has net debt of ~USD10bn (incl inter-company loan of USD750mn) at Q3FY22-end. The term debt of USD2.8bn needs to be repaid in the next 12 months, most of which should be financed at a lower cost.

Rationalising aluminium CoP, beneficiary of higher commodity prices, ESG focus; reiterate BUY

The expansion of alumina refinery from 2mtpa to 5mtpa in FY23 (100% captive alumina on full ramp up v/s 45% currently) along with operationalisation of its captive coal blocks will reduce aluminum CoP to sub USD1,500/t in next 3-4 years. VEDL’s commitment to be net carbon zero by FY50 and to reduce 25% carbon emissions by 2030 from 2021 levels is encouraging. We expect VEDL to generate EBITDA CAGR of 20% during FY21-24E, which provides comfort of paying higher dividend to support the parent company’s debt. Besides fundamentals, the other company-specific events need to be monitored which keeps the interest alive in the stock. We will get more clarity on demerger of different businesses (aluminium, oil and iron ore) of VEDL by March2022-end and how it places its international zinc operations. The financial bids for BPCL is yet to be invited by the Govt where the company has shown interest. We recommend BUY with a TP of Rs466.

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