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Earnings outlook remains strong

Raising estimates on strong commodity prices

* Vedanta (VEDL) reported better-than-expected 4QFY21 results, with EBITDA up 17% QoQ to INR90.4b (est. INR87.6b), at the highest ever.

* With higher commodity prices in the near term, the earnings outlook remains strong. We raise VEDL’s FY22E/FY23E EBITDA estimate by 17%/8%, factoring in higher commodity prices.

* Given the promoter’s intent to increase the stake and loans given to the parent by VEDL, we believe potential corporate actions could be the key drivers of the stock price. Moreover, high leverage and scheduled debt repayments at the parent VRL remain an overhang. Maintain Neutral.

High commodity prices boost EBITDA to all-time high

* 4Q EBITDA rose 17% QoQ (99% YoY) to INR90.4b (est. INR87.6b) and adj. PAT rose 15% QoQ to INR34.9b (est. INR37.4b), led by higher commodity prices. EBITDA (excl. Hindustan Zinc) improved 15% QoQ to INR51.5b.

* Hindustan Zinc Ltd (HZ) had earlier reported EBITDA of INR38.8b (up 19% QoQ; 97% YoY), driven by higher metal volumes and prices (refer note).

* Aluminum EBITDA improved 33% QoQ (141% YoY) to INR27.4b (+16% v/s est). This was attributable to a ~9% QoQ rise in LME Aluminum prices and 8% increase in volumes to 542kt (est 498kt), offset by a 3% QoQ increase in hot metal CoP to USD1,433/t.

* Oil and Gas (O&G) EBITDA improved 25% QoQ to INR10.7b (est. INR10.5b) on sequential recovery in crude prices to USD61.3/bbl (+35% QoQ). Volumes improved 3% QoQ to 165kbpd (est. 168kbpd).

* Consolidated net debt declined INR112b QoQ to INR244.1b (0.9x of EBITDA). Excluding net cash at HZ, net debt stood at INR395b (2.5x of EBITDA).

* FY21 rev / EBITDA / adj. PAT stood at INR880b/INR273b/INR96b (+6%/+41%/+195% YoY). Reported OCF/FCF for FY21 stood at INR240b/INR171b (+24%/+49% YoY).

Highlights from management commentary

* VEDL’s board has approved project capex of INR46.8b for the expansion of its alumina refinery from 2mtpa to 5mtpa by 1QFY23.

* Post the balance sheet date, of the USD966m loans given to VRL, VEDL has received its first installment of USD203m.

* Capex guidance for FY22 stands at USD1.1b (v/s spend of USD0.3b in FY21).

* The management expects a 10-year extension on the profit-sharing contract (PSC) for its O&G block RJ-ON-90/1 in Rajasthan on existing terms (i.e., at 40% profit-sharing). The government, however, demands an increase of 10% in the profit-sharing to 50% to grant an extension. The matter is under litigation and due for hearing on 20th May’21. Pending the outcome of the litigation, the existing PSC has been extended to 31st Jul’21.

Valuation and view

* Higher commodity prices and volume growth in zinc/aluminum should drive strong earnings growth. Over FY21–23E, we estimate a CAGR of 14% in EBITDA and 16% in EPS.

* A loan extension of USD956m to its parent group highlights the stretched balance sheet of the promoter. VRL had net debt of USD7.3b at end-FY20.

* Given the promoter’s intent to increase the stake and loans given to the parent by VEDL, we believe potential corporate actions could be the key drivers of the stock price. At CMP, the stock is trading at 4.8x FY22E EV/EBITDA. We value VEDL on an SOTP basis to arrive at TP of INR300. Maintain Neutral

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