It also harbours strong ambitions and has aligned its strategies to drive the medium-term vision of delivering, deleveraging, and demerging. It aims to deliver growth while improving cost efficiency to clock $10 billion annual Ebitda over the near term, deleverage down to 1x of net debt to Ebitda, and demerge its businesses to unlock value for investors.
Factoring in these plans for growth, investors have lapped up the stock. Vedanta has delivered more than 50% return in the last one year, steeply outperforming the broader Nifty 50’s low single-digit returns. But the ride has been bumpy, as its competitive moat and efforts towards deleveraging and improving cost-efficiency have frequently been overshadowed by its hefty dividend payouts, and delays in its expansion and demerger plans.
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Cost efficiency and deleveraging delivered results
It is India’s largest producer of aluminium and the largest exporter of iron ore. It is also the largest private sector producer of oil, and the only producer of zinc, lead, silver, and nickel in the country. This scale and niche lend significant cost advantage to Vedanta, while revenue visibility is supported by its mining assets with a lifetime of more than 25 years.
Towards clocking $10 billion Ebitda, the company has been cutting costs aggressively. As a result, its aluminium and zinc productions now rank among the top 10% of most cost-efficient production facilities globally. The company has also been pushing the pedal to the metal on project expansion.
With $8 billion in capital expenditure in 50+ high-impact projects, which cost about 30-50% lower than peers, the company targets $6-8 billion inincremental yearly revenues. With scale-driven operational leverage and a higher contribution of value-added products, the projects are expected to be Ebitda-accretive. Around $2-3 billion of incremental annual Ebitda is expected.
In keeping with its vision of achieving 1x net debt to Ebitda, Vedanta Resources (Vedanta Lt.’s parent) has sold more than 10% of its stake in Vedanta Ltd. in the last three years to raise $1.4 billion. It also raised another $1.4 billion from QIP in Vedanta and offer for sale (OFS) at Hindustan Zinc. The proceeds have been used to pay off debt worth $4.5 billion in two years. A further $3 billion debt reduction is expected over the next three years. This should help make Vedanta Resources self-sufficient, wherein its interest costs would be covered in entirety by the brand fees received from Vedanta.
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Competitive strengths span all major segments
Aluminium and zinc together contribute more than 80% to Vedanta’s Ebitda. Driven by domestic economic growth and a multifold jump in demand for energy technologies, the global and domestic demand for these minerals is expected to grow at a CAGR of 2.4% and 7.5%, respectively, between 2023 and 2028.
In its mainstay aluminium business, Vedanta enjoys a competitive moat from its presence in mineral-rich provinces, vertically integrated operations that improve operating cost efficiency, and its proximity to rail and port networks, which help contain logistics expenses. Leveraging these strengths, Vedanta’s aluminium segment commands a 50% market share in India and exports to 60 countries across five continents. Over the near term, Vedanta aims to ramp up its aluminium production from 2,370 kilo-tonnes per annum (ktpa) to 3,100 ktpa while continuing to reduce the cost of production and expanding the operating profit margin.
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Hindustan Zinc, the largest integrated zinc-lead producer, is also a major driver of Vedanta’s business. Its cost-efficiency has been improving, even as the ramp-up of its capacity has been slower than that in aluminum. The 25+ years life of its mining assets provides revenue visibility, while the increasing contribution of value-added products has led to margin expansion.
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At the same time, Vedanta plans to diversify its business by increasing capacity in iron and steel, copper, and other ferrous alloys. Ebitda contribution from these businesses is expected to grow from 5% to 14% over the near term.
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Record earnings in Q3 FY25
Q3 was a blockbuster quarter for the company – year-on-year growth of 10% in revenues, 30% in Ebitda, and 70% in net profit. In fact, Vedanta reported the highest Q3 operating profit in 11 quarters, on the back of 517 bps Ebitda margin expansion.
Revenue growth was led by its largest segments—aluminium and zinc—which grew by 26% and 18%, respectively, year on year. The growth in realizations in these businesses more than made up for the degrowth in its smaller segments, that is, oil and gas, iron ore, and steel.
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Meanwhile, the 30% year-on-year growth in Ebitda for the quarter came on the back of a whopping 58% Ebitda growth in its aluminum business. Behind the aluminium segment’s profitability were higher LME prices for aluminium which more than compensated for the higher alumina costs. Low costs of power and other inputs, hedging benefits, and higher premium commanded have also supported profitability in the segment during the quarter.
Compared to Q3 FY24, net debt has been reduced as well—from 1.7 to 1.4 times its Ebitda. Thanks to the business’ refinancing efforts, the cost of debt too has shrunk by 250 bps. On cue, its credit-rating has been bumped up by a notch to AA.
Notwithstanding this show of strength, the stock has corrected 7% since its earnings were announced on 31 January. This steep underperformance against Nifty 50’s 2.5% drop during this period, can be attributed to disappointments due to continued hefty dividend payouts, and delays in its capex and demerger plans.
Dividends and demerger delays spoil the party
Vedanta has been known to make large dividend payouts, most of which make it to its global parent Vedanta Resources, which holds more than 56% stake in Vedanta. Its dividend yield stands at 65% over five years, and raises the question of growth. In Q3, post capex, the company generated free cash flows worth ₹3,300 crore, all of which was paid out as dividends. When such large portions of cash flows are redistributed among shareholders, rather than being ploughed back into the business to fuel growth or being used to prepay debt, it diminishes the long-term returns of shareholders.
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Moreover, Vedanta’s capex plans have been suffering delays due to global supply-chain hurdles and lengthy government approval protocols. Vedanta’s demerger plans, which had been approved by the board back in September 2023, has also been held up. The demerger promises to simplify the business structure, resulting in 17 pure-play companies across the entire commodity production spectrum. Aluminium, oil and gas, power, steel, and electronics would split out as separate businesses, thereby unlocking value for investors.
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The shareholder and creditor meeting today for the final vote on the demerger is a step in the right direction to take the plans from paper to action. But any delays in the demerger could act as a spoilsport in Vedanta’s otherwise promising growth story.
For more such analysis, read Profit Pulse.
Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa
Disclosure: The author does not hold any shares of the company discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.
Views are personal and do not represent the stand of this publication.
