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Aluminium, Zinc India continue to drive earnings

Vedanta reported lower than expected EBITDA with Q4FY21 print at Rs90.3bn against Rs101.7bn expected. Oil and gas, power and Zinc international operations disappointed, while Aluminium operations continue to surprise on the back of better than expected cost control. FY21 witnessed lowest Aluminium COP in last 7 years at US$1,347/te, down 20% YoY, while achieving highest ever Aluminium production of 1.969mnte, with 2.1mtpa run rate achieved in Q4FY21.

Aluminium along with Zinc India operations continue to drive earnings for Vedanta, as Oil and gas continue to disappoint. FY22E growth capex guidance has been set at US$1.1bn against US$300mn for FY21. Rs63bn capex has been announced in the Aluminium operations including Lanjigarh refinery expansion from 2mtpa to 5mtpa for Rs46.8bn. We maintain REDUCE with a revised target price of Rs248 at FY23E PB of 1.5x given our revised FY23E RoE expectations.

* Rs63bn capex announced, to further augment earnings from the Aluminium business.

3mtpa expansion of Lanjigarh refinery (targeted completion of Q1FY23) for Rs46.8bn; Rs10.5bn for 100ktpa Jharsuguda smelter expansion along with investment in rail infrastructure. Rs3.48bn has been allocated for expansion of rolled product facility at BALCO from 50ktpa to 130ktpa. Rolling capacity (billet) in Jharsuguda smelter to be increased by 120ktpa with an investment of Rs1.94bn. Aluminium projects added US$300mn towards growth capex in FY22E. Q4FY21 EBITDA surprised because of higher sales and better than expected cost control.

* Oil and gas business EBITDA disappoints.

While operating costs have increased from USS$7.7/boe to US$9/boe QoQ, EBITDA hardly increased US$0.9/barrel even as Brent prices increased US$14/barrel. There can be many reason for the margin underperformance including higher discount applicable to increasingly higher gas production. Production lags expectations, increasing only 3.3%QoQ in Q4FY21. Management guides for 175-185kboepd in FY22, another muted print with 105- 106kboepd of base production (down 6-7% YoY) and 70-80kboepd from the growth projects. There is a natural decline of 20% that Rajasthan is experiencing, restricted at 6-7% through decline management and optimisation activities. US$203mn has been allocated towards additional infill wells.

* Zinc International:

Gamsberg Ramp up Plan. Vedanta plans to rampup Gamsberg from 145kte in FY21 to 190-210kte in FY22E; capacity in the first phase of the expansion being 240ktpa. The increase is targeted through i) improvement in equipment run hours by 30% ii) improve recovery from 75 to 85% and iii) increase mill and crusher throughput with a target ore treatment of 4.8mtpa. Given the current RnR and the ability to access the same through multiple open pit mines, with the stabilization of the concentrator plant operations management feels confident to soon embark for the next phase of expansion in Gamsberg i.e 500ktpa. Q4FY21 disappointed on volumes as well as margins. While Gamsberg has been ramping up, Zinc international is not being able to deliver the expected earnings trigger.

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