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Next growth phase - Capacity scale, RM integration, and cost leadership

We remain constructive on Vedanta Aluminum Metal (VAML), as it is well positioned to benefit from favorable industry dynamics, company-specific structural drivers, and a valuation gap with peers. The company is entering a strong earnings inflection point (EBITDA projected to expand at ~18% CAGR over FY26-28), supported by a multi-year earnings growth runway, which is largely driven by three levers: volume scale, integration-led structural cost reductions, and a rising value-added mix. The global aluminum market is structurally tightening due to China's production cap, supply disruptions in Europe and Russia, and years of underinvestment outside China. This, coupled with India's robust demand growth and significant import substitution opportunities, creates a favorable outlook for VAML. Further, the valuation gap between VAML and its peers provides an opportunity for a structural re-rating of valuation multiples. At CMP, the stock trades at 5.3x EV/EBITDA on our FY28 estimate. We reiterate a BUY rating with a TP of INR540 (premised on SoTP valuation) on FY28 estimate.

Scaling to global leadership via fully integrated business model

* VAML currently operates ~2.9 MTPA of aluminum smelting capacity across Jharsuguda (1.85 MTPA) and BALCO (~1 MTPA, including the 435ktpa expansion). The ongoing commissioning of BALCO, coupled with debottlenecking at Jharsuguda, is likely to take the aggregate smelting capacity to ~3 MTPA by FY28E-exit, driving ~6% volume CAGR till FY28.

* More importantly, VAML’s competitive proposition is increasingly being shaped by vertical integration rather than capacity alone. The company has built an integrated value chain spanning bauxite mining, alumina refining, and aluminum smelting. The Lanjigarh alumina refinery has been expanded from 2 MTPA to 5 MTPA, materially strengthening internal alumina availability and reducing dependence on external procurement.

* Currently, VAML is largely dependent on externally sourced input material for its operational feedstock, with landed alumina costs at +USD430/t, while captive alumina costs (bauxite sourced externally) are broadly comparable with market prices at ~USD360/t. We expect the economics to improve with the ramping up of Sijimali bauxite mine and Lanjigarh Alumina refinery. The captive sourced bauxite will largely remain at par with OMC (landed bauxite cost stood at USD80/t from Guinea) on account of higher premium of 112%.

RM security to drive VAML into the top decile of the global cost curve

* VAML’s self-sufficient strategy is centered on securing critical upstream input material (bauxite and coal). The company has secured a bauxite mine with 300MT reserves and five coal mines with combined reserves of ~1,048 MT.

* The Sijimali bauxite mine is expected to commence operations in 2HFY27 with 12mtpa capacity. Post-commissioning, VAML’s total requirement is expected to be 15mt, of which 12mt will be sourced captively and the rest ~3mt procured from OMC.

* In parallel, captive coal production is expected to rise sharply from ~2.6MTPA currently to >40 MTPA by FY28-29. The strategic proximity with these mines should further reduce logistics costs and provide insulation from external raw material volatility.

* Power alone contributes nearly 40% of aluminum production costs, making access to competitive energy a critical determinant of long-term positioning. VAML operates ~4.5GW of captive power capacity and has additionally secured ~1.3GW of renewable energy through long-term agreements, strengthening its energy-cost advantage.

* Management is targeting a further 9-12% reduction in costs, with hot-metal cost of production expected to reach USD1,550-1,600/t. We believe the combination of Sijimali ramp-up, higher captive coal availability, operating efficiencies, and increasing scale can drive VAML toward the top decile of the global aluminum cost curve.

Valuation and view

* India offers an equally compelling long-term opportunity as domestic aluminum demand is expected to grow at an 8-9% CAGR and reach 8-8.5MT by FY30, driven by infrastructure development, electrification, automotive demand, renewable energy investments, and manufacturing growth.

* The country's persistent aluminum import dependence further creates a sizeable import substitution opportunity for domestic producers.

* In our view, VAML's ongoing backward integration, rising contribution from VAP, and robust domestic demand outlook provide strong visibility on earnings growth and cash flow generation over the medium term. We forecast its consolidated revenue/EBITDA/PAT to expand at ~11%/18%/23% CAGR over FY26-28, aided by volume growth, margin expansion, and increasing downstream contribution.

* The stock currently trades at 5.3x FY28E EV/EBITDA. On an SoTP basis, we derive a fair value of ~INR540/share on FY28 estimate, reiterating our BUY rating on the stock.

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