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Aluminium and steel can draw further capex

Vedanta reported lower than expected EBITDA with Q1FY22 print at Rs99bn against Rs109bn expected. Oil & gas continues to disappoint, while Aluminium operation continues to surprise. Q1FY22 witnessed ~ Rs15bn of debt repayment (intercompany) from VRL – normalisation of the intercompany structure will be deemed a positive, aided with reduced cashflow pressures across the corporate structure given sustained higher commodity prices.

Capex for the full year has been maintained at US$1.8-2bn, capex for the quarter stood at ~Rs21bn. Vedanta has announced another Rs66bn of capex in Aluminium smelter at BALCO (411kte); Rs63bn capex was announced in Alumina in Q4FY21 taking new cumulative capex in Aluminium to ~Rs120bn. This will increase Aluminium capacity to 2.8mtpa in 1-2 years. We maintain REDUCE with an unchanged target of Rs248 at FY23E PB of 1.5x.

* Reiterating growth areas, announcing new growth projects. Vedanta continues to ramp up in Oil & Gas, Zinc India, Zinc International, Steel and Aluminium, while leveraging structural reduction in cost and better capital management. Management highlighted the potential to achieve-2.3mtpa @ US$1200 COP Aluminum, 300kte in Gamsberg, 300kboepd in Oil & Gas; 1.2mtpa mined metal production and 1,000te of Silver in Zinc India and 3.0mtpa at Electrosteel Steels (ESL). Management has announced two new expansions i) BALCO expansion of 414kte (with associated downstream) for Rs66.1bn which along with rampup in Jharsuguda (line 6) will take Aluminium production to 2.8mtpa in 1-2 years ii) doubling capacity of steel in ESL ( from 1.5 to 3mtpa) which includes ~ doubling of DI pipe capacity. Growth capex for the year is ~US$1.2bn and total capex is US$2bn.

* Oil and gas business EBITDA disappoints. Mainly driven by higher percentage of profit sharing (@60% vs 50% QoQ) for Q1FY22. RDG should start contributing from Q2FY22, yet the impact of Covid may be slightly long lasting in deterring production rampup given involvement of foreign contractors (in our view). New growth projects of US$550mn are progressing as per plan.

* Steadily building up the ferrous portfolio. Not only has ESL announced doubling of steel capacity to 3mtpa, pig iron business in Goa is reaching production runrate of 0.8mtpa. Acquisition of Gujarat NRE coke has made Vedanta as one of the largest merchant coke producer in the country. Vedanta has also increased chrome ore mining in FACOR, ramped up production, completed conceptual design of 88kte furnace. We believe, going forward one can expect more capital allocation in this space.

* Net Debt ex Hind Zinc decline ~ Rs20.35bn QoQ. Net Debt to EBITDA (ex Hind Zinc) improved to an all-time low of 1.5x (annualised for Q1FY22). This has been helped by Rs14.96bn of debt repayment (intercompany) from VRL. Consolidated Net Debt to EBITDA of 0.6x is lowest in last 4 years, helped by commodity.

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