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Sustaining operational gains as market prices benefit

Vedanta has reported in-line Q3FY21 EBITDA of Rs77.6bn. Intercompany loans to parent Vedanta Resources (VRL) stood at US$956mn as at Q3FY21-end (unchanged QoQ). Management guided for reduction of intercompany loans as per repayment schedule. Also, all dividend received from Hindustan Zinc need not be upstreamed, as per extant dividend policy and under special circumstances. While Q3FY21 was underpinned by strong operational performance, capital allocation remains uncertain. FY21E capex will be lower than previously guided. We maintain REDUCE on the stock with an increased target price of Rs137/share (earlier: Rs110) at P/B of 1x FY23E

* Consolidating on costs and enjoying the benefits of higher LME prices in aluminium business. Vedanta has achieved an impressive cost reduction in its aluminium segment from US$1690/te in FY20 to US$1,300-1,350/te in FY21E. Next phase of aluminium CoP reduction from US$1,300-1,350/te to US$1,200/te in 2-3 years will be driven by: i) Lanjigarh capacity expansion from 2mtpa to 5mtpa; ii) operationalising of coal blocks {Vedanta won Radhikapur (West) coal block in the recent auctions}; and iii) incremental operational improvements across assets.

* Zinc India’s journey to 1.5mtpa mined metal production, and divestment of residual government stake, can help unlock value. Zinc India completed 1.2mnte mined metal project activities. Vedanta has projected 1.2mnte of mined metal production in FY22/FY23 and 1.5mnte by FY25/FY26. Silver production guidance has been pegged at 800te for FY22/FY23 and at 1,000te for FY25/FY26.. CoP is expected to reduce to US$900/te in the medium term from US$958/te in 9MFY21. Interestingly, minor metal extraction has been highlighted by management as one of the structural initiatives aimed at reducing costs.

* Gamsberg’s ramp-up journey continues. Gamsberg achieved its all-time high MIC (metal in concentrate) production at 43kte, up 39% YoY and 23% QoQ. CoP was at US$1,240/te, down 13% YoY and almost flat QoQ, due to better recoveries; cost control measures though were offset by exchange rate appreciation. Management expects to ramp up average daily production from 469tpd to 600tpd by Q4FY21-end.

* Oil and Gas – Q4FY21 can see the start of production recovery. Q3FY21 gross production declined 3% QoQ. There has been delay of a quarter across growth projects in the segment. This includes polymer injection in MBA fields (will arrest decline in production), surface facility commissioning of Aishwarya Barmer Hill (projected to increase volumes by 7kboepd), liquid handling capacity increase at MPT (to increase volumes by 5kboepd), and exploration drilling in RJ fields (in the course of Q4FY21-Q1FY22). Drilling activities have significantly increased with 131 wells hooked up till now (98 till Q2FY21). Operating cost was at US$7.7/boe in Q3FY21 vs US$7.0/boe in Q2FY21, up 10% due to increase in workover activities.

* Maintain REDUCE with a revised target of Rs137/share

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