FY22/23e Ebitda up 28/15% on strong commodity prices; TP raised to Rs 270 from Rs 180; ‘Reduce’ maintained
VEDL’s Q4FY21 EBITDA recovered strongly (+99% y-o-y, +17% q-o-q) led by higher commodity prices and controlled costs. Zinc and aluminum, which form ~70% of consolidated earnings, are both benefiting from strong prices and muted costs. A strong price environment and higher dividend potential reduce concerns of promoter debt. We increase our Ebitda estimate by 28%/15% for FY2022/23e on higher commodity prices and FV to Rs 270 (from Rs 180). REDUCE.
Q4FY21—strong earnings led by higher commodity prices and higher volumes
VEDL’s Q4FY21 consolidated Ebitda of Rs 90 bn (+99% y-o-y, +17% q-o-q) came in line with our estimates led by sharp sequential volume growth, price recovery and muted costs across divisions. Consolidated net debt at Rs 244 bn increased 14% y-o-y (-31% q-o-q). Standalone debt (consolidated ex HZL, Balco) declined by 4% y-o-y to Rs 374 bn (-14% q-o-q).
Key divisional performance in Q4FY21: (i) The aluminum division reported an Ebitda of $692/ton (versus $565/ton in Q3FY21) led by higher aluminum prices, partially offset by higher costs; (ii) the oil & gas division saw 3% y-o-y volume increase while Ebitda increased by 23% y-o-y led by higher crude oil prices; and (iii) Zinc International reported an Ebitda of Rs 2 bn from a loss of $610 mn in Q4FY20 led by higher zinc prices and lower costs. Ebitda from the iron ore business increased to Rs 8 bn (+127 y-o-y, +39% q-o-q) on record high iron ore prices.
All three key businesses to deliver earnings growth over FY2022-23E
VEDL has exposure to seven commodities but earnings from zinc, aluminum and oil form ~80% of its attributable Ebitda. We expect Ebitda from these three businesses to increase from Rs 174 bn in FY2021 to Rs 237 bn in FY2023e (+36%) and the remaining businesses to remain stagnant over FY2021-23e. (i) The aluminum division will benefit from higher prices led by demand growth and Chinese supply restrictions. Further, VEDL would increase its smelting capacity to 2.3 mtpa from 2 mtpa and alumina refinery to 5 mpta from 2 mtpa over FY2022-23e. (ii) Zinc—stable prices and 28% metal volume growth over FY2021-23e led by volume ramp-up in India and Zambia. (iii) Oil and gas—higher prices with recovery in demand and 20% volume growth over FY2021-23e as the growth projects at Cairn start to deliver.
Well-placed amid commodity price buoyancy, upgrade earnings
The promoters have increase their stake in VEDL to reduce dividend leakage—(i) by 4.98% through a creeping acquisition in December 2020 and (ii) by 10.01% through a voluntary open offer in January 2020, taking overall holding to 65.18%. Further attempts to increase stake cannot be ruled out. We have raised Ebitda by +28%/+15% for FY2022e/23e primarily on higher commodity prices. Maintain Reduce.