Downgrade Vedanta to ‘reduce’ on Covid-induced lockdowns

Vedanta reported higher than expected Q1FY21 numbers. Aluminium Ebitda constituted ~72% of the Ebitda beat. The segment’s Ebitda/te surprised at $360/te, of which $101/te was on account of RPO liability reversal. Adjusted for RPO liability, costs reached $1343/te, down ~$110/te q-o-q and ~$420/te y-o-y. Power contributed ~12% of the Ebitda beat, which can be attributed to 97% Talwandi Sabo (TSPL) PAF, while sales from TSPL was only 643 million units (down 76% y-o-y).

TSPL receivables reduced in FY20. There has been significant cost reduction in Zinc International (22% yo-y and 24% q-o-q) and currency depreciation of the host countries played a big part. Production at Gamsberg is still at 25kte as at June. Covid lockdown makes assessment difficult for Rajasthan assets. The delisting process is underway; $300 million again has been extended as an intercompany loan to Vedanta resources. Downgrade to ‘reduce’ from ‘hold’.

Cost of production (CoP) reduced from $1,764/te to $1,268/te y-o-y. This was helped by RPO liability reversal of $101/te. Alumina production costs in aluminium dropped by ~$54/te q-o-q, power costs fell by ~$100/te q-o-q while other hot metal and conversion costs were down ~$40/te q-o-q. CoP in Jharsuguda reduced by 13% q-o-q while that in BALCO shrunk 11% q-o-q. While cost reduction directionally is more pronounced in Jharsuguda (q-o-q), BALCO Ebitda increased by 76% q-o-q while VAL Ebitda declined 5% q-o-q. Hopefully, Vedanta holds on to the improvement in BALCO.

CoP for Zinc International reduced by $435/te q-o-q, which largely explains the $394/te q-o-q improvement in Ebitda/te.