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Revenue beats estimate; EBITDA in line

Cost of production set to decline as coal linkage improves

* Vedanta (VEDL)’s consolidated net sales stood at INR379b (down 5% YoY/up 11% QoQ) in 4QFY23, 7% above our estimate of INR353b. Revenue growth was fueled by better performance across all the verticals (especially aluminum, copper and iron ore) during the quarter. *? VEDL’s consolidated EBITDA was at INR95b (down 31% YoY/up 34% QoQ) in 4QFY23, in line with our estimate of INR91b. Aluminum vertical grew 93% QoQ to INR19b; HZL was up 15% QoQ to INR43b and iron ore vertical jumped ~5x QoQ to INR3.6b. All the verticals were profitable during the quarter.

* VEDL’s APAT stood at INR32b (down 50% YoY/up 106% QoQ) against our estimate of INR37b. The miss was led by higher finance cost and depreciation, partially offset by higher other income and lower taxes.

* LME prices across the non-ferrous portfolio improved QoQ. Zinc/Lead/ Copper/Aluminum prices were up 4%/2%/12%/3% on a QoQ basis.

* The company’s sales volumes across the sector improved QoQ (except the oil & gas vertical). Sales for steel/aluminum/zinc/iron ore rose 30%/2%/5%/ 21% in 4QFY23.

* VEDL’s net debt stood at ~INR445b and net debt/EBITDA rose to 1.3x in FY23 from 0.5x in FY22.

* Coal linkage for the aluminum business stood at 66% and with the commissioning of Jamkhani mines it should improve further to 80% by endFY24, thereby lowering CoP in the coming quarters.

* VEDL’s total dividend payout for FY23 stood at INR101.5 per share.

Highlights from the management commentary

* On track to be self-sufficient in coal: The company recently commenced its operations at the Jamkhani coal mine and with more mines scheduled to open, VEDL is on track to achieve self-sufficiency in thermal coal. This would be a structural move towards reducing the CoP.

* The Jamkhani mine is currently operating at PRC of 2.6mt and VEDL has submitted the proposal to expand the same to 3.9mt. The expanded capacity should be operational from FY24-25E onwards.

* VEDL has emerged as a successful bidder for Ghogharpalli coal block that has PRC of 20mt and Barra coal block with unexplored reserves.

* Aluminum business: The company continues to focus on volume growth and increasing the share of value-added capacity, which should improve margins. VEDL is undertaking strategic capacity expansions of its alumina as well as aluminum facilities which should add incremental volumes and drive higher share of Aluminum EBITDA in the company’s total EBITDA.

* Record capex: VEDL has earmarked a record capex of ~USD1.9-2.0b in FY24E, which will augment volumes across verticals.

Valuation and view

* Globally, commodities market is facing multiple headwinds such as inflationary pressure, weak macroeconomic scenario, recessionary pressures across Europe, liquidity crunch across some developing countries, muted demand pick-up from China and slowdown in Chinese real estate sector.

* We have largely retained our FY24 EBITDA and APAT forecasts. We reiterate our Neutral rating on VEDL with an SoTP-based TP of INR280. At CMP of INR275, the stock is trading at FY24E EV/EBITDA of 5.3x and FY24E P/B multiple of 2.2x.

* While we marginally reduce our aluminum volume and EBITDA/t assumptions, savings from captive/linkage coal should help offset the downtrend.

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