Buy Vedanta Aluminum Ltd for the Target Rs 540 by Motilal Oswal Financial Services Ltd
Integrated Advantage, Structural Upside
* The demerger of Vedanta Ltd, effective 1st May’26, resulted in the creation of Vedanta Aluminum Metal Ltd (VAML) – India's largest pure-play primary aluminum company and the third-largest aluminum producer globally, excluding China.
* The company has emerged as one of the most compelling structural stories in the global aluminum space, combining industry-leading scale, extensive backward integration, and a multi-year earnings growth trajectory. VAML is uniquely positioned to benefit from both favorable industry dynamics and company-specific structural drivers.
* VAML is approaching a significant earnings inflection point, with EBITDA anticipated to post over 18% CAGR over FY26-28. This growth will be driven by three simultaneous factors: volume expansion, structural cost reductions, and an increasing contribution from value-added products. Importantly, the global aluminum market is experiencing structural tightening due to China's production cap, supply disruptions in Europe and Russia, and years of underinvestment outside China. This is further supported by India's robust demand growth and a substantial opportunity for import substitution.
* At CMP, the stock trades at 5.4x EV/EBITDA on our FY28 estimate. We initiate coverage on the stock with a BUY rating and a TP of INR540 (premised on an SoTP valuation). We believe the transition toward becoming more captive and backward integrated will support a structural re-rating of valuation multiples.
* Key risks to our thesis include execution risks, aluminum price volatility, input cost inflation, and trade-related challenges.
Scaling to be the largest aluminum producer globally through a fully integrated business model
* VAML is India's largest aluminum producer with ~60% domestic market share and the third-largest producer globally (ex-China). The company operates 2.9 MTPA of smelting capacity across Jharsuguda (1.85MTPA) and Bharat Aluminum Company Ltd (BALCO – 1MTPA; including the 435ktpa expansion). BALCO's ongoing commissioning and Jharsuguda debottlenecking will increase total capacity to 3MTPA by FY28-exit. We expect VAML’s aluminum volumes to clock ~6% CAGR, reaching 2.8mt over FY26-28, driven by BALCO ramp-up and debottlenecking initiatives.
* VAML is a fully integrated aluminum producer from bauxite to smelting. The Lanjigarh refinery has been expanded from 2 MTPA to 5 MTPA, enhancing alumina self-sufficiency.
* The current captive alumina costs are broadly at par with market prices. We expect cost savings to kick in from FY28E with the steady ramp-up and commencement of operation of the Sijimali bauxite mine.
* Power constitutes nearly 40% of aluminum production costs, making low-cost energy a key competitive differentiator. VAML operates ~4.5GW of captive power capacity and has secured an additional 1.3GW of RE via long-term agreements, providing a significant cost advantage over peers.
Structural cost leadership via further integration and raw material security
* VAML is pursuing full self-sufficiency in bauxite and coal, the two most critical inputs for aluminum production. The company has secured a bauxite mine with 300 MT reserves and five coal mines with combined reserves of ~1,048MT.
* The Sijimali bauxite mine is anticipated to commence operations in 2HFY27 and reach full capacity by FY28. Captive coal production capacity is expected to increase from 2.6 MTPA currently to over 40 MTPA by FY28-29E.
* Strategic proximity of mines reduces logistics costs and enhances the operational flexibility of plants.
* Management guided an additional 9-12% reduction in costs, reaching hot metal CoP of USD1,550-1,600/t. We estimate that the full ramp-up of the Sijimali bauxite mine and other operating cost efficiencies will drive cost reduction and position the VAML in the elite top decile of the global aluminum cost curve.
* The share of value-added products (VAP) is targeted to improve further from 71% currently to 90% over the medium term, led by new downstream capacity additions. The improved VAP mix is likely to provide a notable uplift to realizations, margins, and return ratios
Strong earnings aided by robust volume, rising efficiencies, and resilient pricing
* The company is approaching a significant earnings inflection point, with EBITDA expected to increase to ~INR350b by FY28 from ~INR250b in FY26, implying a CAGR of 18% over FY26-28E.
* This growth is underpinned by three structural drivers:
1) Higher volumes from capacity expansion
2) Sustainable cost reductions through backward integration
3) Improving realizations from a richer value-added product mix.
* Strong operating cash flow generation of nearly INR470b during FY26-28E should adequately fund the remaining capex requirements while supporting rapid deleveraging, with Net Debt/EBITDA expected to decline below 1.5x. With most of the capex already incurred, the balance sheet deleveraging is likely to accelerate.
Valuation and View - A value-unlocking story
* 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 grow at ~11%/18%/23% CAGR over FY26-28, aided by volume growth, margin expansion, and increasing downstream contribution.
* We initiate coverage on VAML with a BUY rating and an SoTP-based TP of INR540 per share. Our recommendation is backed by its market leadership, unique vertically integrated operation, superior scale, and a credible pathway to becoming one of the world's lowest-cost aluminum producers.
