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Well positioned; focus on structural cost rationalization to drive earnings

* We visited Vedanta (VEDL)’s Jharsuguda plant in Odisha, Dariba (SK Mines), and Barmer block in Rajasthan to get a deeper understanding of its processes and operations. ? Jharsuguda is the world’s largest single-location smelter, with a capacity of 1.8mtpa; it also has a 3.6 GW captive power plant. The Dariba Smelting Complex currently has a smelting capacity of 240ktpa for zinc, and 120ktpa for lead, with a 7mtpa ore mining capacity (overall reserve of ~190mt post-depletion). The Mangala Processing Terminal (Barmer) is the largest onshore discovery ever in India.

* All the facilities are highly automated with significant usage of technology and other equipment to control operations. VEDL is following strict safety measures and providing simulation-based training processes for optimum efficiency.

* VEDL is continuously striving to reduce costs across its businesses through backward integration, operational efficiencies, and captive power usage (including renewables). The capex plans are progressing well to drive the next level of growth. VEDL expects cash flows to be sufficient to manage the upcoming debt maturities in FY25 and is exploring refinancing options where feasible. The demerger is on track and is anticipated to be completed by the end of CY24. The company has obtained clearance from nearly all stakeholders. We reiterate our Neutral rating on VEDL with a revised SoTP-based TP of INR500.

Jharsuguda – Aluminum facility

* The Jharsuguda plant is one of the most efficient and low-cost smelting plants, supported by: 1) proximity to coal mines and water resources; b) captive alumina supply; c) captive power access; and d) logistics support with access to ports.

* The plant is highly automated, with significant usage of technology and other equipment to control operations. It is following strict safety measures and providing training processes for optimum efficiency.

* VEDL expects to clock aluminum volumes of 3.1 MMT with EBITDA/t of USD1,350. The EBITDA/t improvement would be driven by cost rationalization efforts, which include coal block commissioning, higher captive linkage, and improved efficiency. Through automation and usage of latest technology, further cost reduction is aimed at every process level.

* The company expects LME Aluminum prices to remain strong in the near to medium term due to deficit market conditions.

Dariba – Zinc facility

* SK Mine – Dariba is the world’s largest underground Zinc mine and one of the largest zinc-lead producing assets globally. It is also the world’s secondlargest silver-producing mine.

* The Dariba complex produces 7 MTPA of ore annually with 240 KTPA of Zinc and 120 KTPA of lead smelting capacity. HZL today is a fully-integrated zinclead-silver producer with the second highest zinc R&R base globally, and having an average grade of over 5% with 25+ years of mine life.

* HZL commands 75% market share in India’s primary zinc market. Its EBITDA margin is driven by technological advancements, cost optimization, and strong resource base. It sources 50% of energy requirements from renewables.

* Going forward, HZL will target 1.2 MT of Zinc production with USD1,000/t of CoP. It eventually plans to ramp up zinc production to 2 MT over the long term. In Silver, HZL targets 1,000 MT production with Fumer route and 1,500 MT with 2 MTPA metal.

* Value-added focus areas: The company is focused on the VAP portfolio, with commissioning of the alloy plant and steady progress of the fertilizer plant.

* The processes are highly automated with safety checks in place and high usage of technology. Specialized operations such as drilling etc. are also being controlled with the help of technology.

Valuation and view

* VEDL’s site visit highlights that the company is operating with a technologically advanced asset base. VEDL is continuously striving to reduce costs across its businesses through backward integration, operational efficiencies, and captive power usage (including renewables). The capex plans are progressing well to drive the next level of growth for the company.

* VEDL currently trades at 5.8x FY26E EV/EBITDA. We raise our EBITDA estimates by 20%/23% for FY25/26, considering the various cost-reduction initiatives being undertaken by the management. We reiterate our Neutral rating on VEDL with a revised SoTP-based TP of INR500.

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