Buy Vedanta Ltd For Target Rs.478 By Centrum Broking Ltd
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Vedanta (VEDL IN) reported in line with our estimate adjusted EBITDA of Rs99.5bn, up 13% QoQ (CentrumE: Rs98.7bn). The outperformance in aluminum, power, Zinc India, Steel business and Zinc International was offset by underperformance in Oil and gas and Copper segment. Ex-HZ, EBITDA was Rs51.3bn, up 17% QoQ due to higher profitability in aluminium business (up 48% QoQ), zinc international, power and steel business. VEDL is witnessing various positive developments – 1) Capacity expansion 2) Cost reduction 3) Improving liquidity and overall financial muscle with net debt/EBITDA dropping to 1.2x. We believe company is set to reap earnings and margins growth over next 2-3 years and can achieve USD10bn in EBITDA over next 5 years. We maintain our FY25/FY26 DPS estimate of Rs45/sh (~11% dividend yield), as VEDL intends to reduce leverage of the parent company, Vedanta Resources (VRL). Our equity target price is revised higher to Rs478 (earlier Rs438), based on FY26E SoTP. At CMP, we see upside of ~15% with BUY rating.
EBITDA ex-Hindustan Zinc was up 17% QoQ, driven by Aluminium segment
EBITDA ex-Hindustan Zinc was up by 17% QoQ to Rs51.3bn due to increase in EBITDA in aluminium business by 40% QoQ partially offset by loss in copper business. Power revenue increase by 19% QoQ in Q1FY25 due to increase in realisation/t by 30% QoQ partially offset by increase in CoP by 4% QoQ in Q1FY25. Aluminium reported adj. EBITDA of Rs41.9bn, up 40% QoQ due to lower aluminium cost (down 6%, i.e. USD1564/t QoQ) and increase in realisation/t by 14% QoQ. Volume was down by 3.6% QoQ to 582kt. Aluminium cost remain flattish QoQ to USD1716/t beating annual COP guidance of USD1800-1900/t and expected to further deccine to USD1600-1700/t which leads to margin expansion and increase in LME price. Further ramping up of alumina capacity of 5mtpa and increasing bauxite mix helps in EBITDA/t to reach USD1000/t in FY26. Oil & Gas segment EBITDA was down by 29% QoQ in Q1FY25 to Rs10.8bn and revenue decline by 13% QoQ to Rs29.25bn
Capacity expansion, Net debt and FCF
VEDL is expanding its aluminium capacity at Balco by 600ktpa and improving VAP mix to 90% of product portfolio which leads to cost optimization through captive alumina and coal supply leading to margin expansion from USD600/t in Q4FY24 to USD1000/t in FY26E. The Kurloi and Radhikapur coal mine is expected to be commission by Q1FY26. Ghogarpalli mine is expected to commission by Q2FY26 and Sijimali by Q1FY26. The 1000MW Meenakshi power plant capacity is expected to commission by FY25-end (earlier: mid-FY26E). VEDL received all clearances to operate Bicholim iron ore mine in Goa having 3.2mtpa capacity. Net debt stood at Rs 613bn as on June-end and generated FCF pre capex stood at Rs 43.7bn. Net debt/EBITDA improved from 1.9x to 1.5x YoY.
On path of strong growth; Maintian BUY TP of Rs478
For Q2FY25, we expect sharp some moderation in margins across segments due to fall in commodity prices. We expect zinc india and aluminium to grow by 20% and 42% CAGR over FY24-26. Despite huge dividend payout of Rs45/sh each for and capex outlay of ~USD2bn each in FY25 and FY26, we expect strong earnings visibility and recently raised funds will help to generate strong FCF to deleverage net debt position by ~USD1.8bn. We maintain BUY rating with TP of Rs478, based on FY26 SoTP
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