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Healthy operational performance; focusing on debt reduction

* In 2QFY24, VEDL received a one-time revenue and EBITDA gain of INR47.6b related to the award of the final partial arbitration that VEDL has won in relation to a contract for Rajasthan Block. For a like-to-like comparison, we have adjusted 2QFY24 financials by excluding this one-time gain.

* Revenue stood at INR341b (up 6% YoY) and was 5% above our estimate of INR325b. Consolidated EBITDA stood at INR67b, in line with our estimate of INR65b. EBITDA was supported by improved operational efficiency and favorable input prices, which were partially offset by lower commodity prices and strategic hedging gains. ? Among segments, aluminum, steel and iron-ore businesses saw strong improvements in EBITDA, whereas Zinc India, Zinc International and copper verticals saw pressure on EBITDA.

* APAT stood at INR5b vs. our estimate of INR12b. Net debt stood at INR577b and net debt/EBITDA stood at 1.64x in 2QFY24 vs. 1.98x in 1QFY24.

Highlights from the management commentary

* VEDL has ~INR90b of debt that will be up for refinancing by 4QFY24 and has USD1b of debt that will be up for refinancing at HoldCo.

* HoldCo. has ~USD3.1b of debt maturing in FY25, including USD2b bonds.

* The recent arbitration case in favor of VEDL will reduce payout to the government by USD20m per quarter in the oil and gas vertical. VEDL would also receive INR10b per quarter over the next five quarter, which will increase the cash flow of the vertical.

* VEDL has earmarked ~USD150-200m as growth capex for its oil and gas vertical for drilling new wells, which should help the company manage the natural decline in fields. VEDL expects to spend ~USD1.7b as growth capex in FY24.

Valuation and view

* EBITDA performance, excluding the arbitration claim, has been largely in line with estimate. VEDL will continue to focus on debt reduction. The de-merger process is underway and is expected to be completed as per the timeline.

* We marginally reduce our FY25 EBITDA estimate by 4%, considering headwinds in the global commodity market, such as lower demand from China, a slowdown in China’s real estate sector, uncertainties in the Middle East and low LME prices. We reiterate our Neutral rating on VEDL with an SoTP-based TP of INR220. At CMP of INR233, the stock is trading at FY25E EV/EBITDA of 6.3x and FY25E P/B multiple of 3.2x.

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