Vedanta Limited (VEDL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Vedanta Limited's Second Quarter and Half Year FY '26-'27 Earnings Conference Call. From the management side, we have with us Mr. Charanjit Singh, Group Head, Investor Relations; Mr. Arun Misra, Group CEO; and Mr. Ajay Goel, Group CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Arun Misra for his opening remarks. Thank you, and over to Mr. Misra.

Good afternoon, everyone, and thank you for joining us. We recorded another strong quarter for Vedanta. EBITDA doubled year-on-year to INR 9,938 crores and the margin improved to nearly 60% from 49%, driven by strong operational performance, lower costs and higher commodity prices. Revenue grew 57% year-on-year to INR 25,812 crore, and PAT increased 151% year-on-year to INR 6,202 crore with pre-CapEx free cash flow of INR 5,803 crores, our net debt-to-EBITDA ratio now stands at 0.1x. Coming to business segment operations. Zinc India delivered another record quarter. Mined metal production increased 5% year-on-year to 271 kt, while refined metal production rose 7% to 264 Kt, supported by smelter debottlenecking initiatives. Silver production reached a record 173 tonnes, up 20% year-on-year. Importantly, zinc cost of production declined 29% year-on-year to per tonne, driven by better mined grades, higher metal production and stronger byproduct realizations. Zinc International delivered 53,000 tonnes of mine metal during the quarter, Black Mountain mine produced 7.1 kt MIC with stabilization of plant operations. Encouragingly, Gamsberg Phase 2 has started its operations, positioning the business for a step change in volumes in the coming quarters. Packer delivered a resilient quarter 2 FY '27 performance, generating EBITDA of $8 million, a 267% increase year-on-year. Ferrochrome production increased 26% year-on-year to 24 Kt as chrome production reached 50 kt, up 6% year-on-year. The business continues to benefit from 100% captive or sourcing which significantly strengthens its cost potion versus external procurement. In copper, we achieved the highest ever quarterly cathode production of 46 kt, up 15% year-on-year. At our Fujairah operations, sales were impacted by supply chain disruptions arising from the closure of Strait of Hormuz, although operations have since normalized and we expect quarterly run rates to 20,000 tonnes and more by quarter 3 FY '27. Beyond our operating assets, we continue to strengthen Vedanta's future resources base through the acquisition and advancement of critical mineral blocks across India. Today, the group has secured 11 critical mineral blocks covering commodities such as manganese graphite, vanadium, cobalt, Jangsten, nickel and rare earth elements with exploration progressing across multiple blocks. These assets position us well to participate in India's growing critical minerals ecosystem while creating a strong pipeline of future growth opportunities and enhancing long-term resource security. On growth capital expenditure, we invested INR 1,135 crores during the quarter across our priority projects. Key progresses include the commissioning of Gamsberg phase 2 continued development of 250,000 tonnes per annum integrated zinc smelter at Debari, expansion of FACOR Ferrochrome capacity to 450,000 tonnes per annum and ongoing execution of our copper rod plant in Saudi Arabia where construction is progressing and commissioning is targeted for quarter 3 FY '27. Additionally, at FACOR, the 75 MB on expansion remains on track for commissioning in second half of FY '28 while a favorable [ Orissa High Court ] order for the Ostapal Mine supports the planned restart of mining operations in second half of the current fiscal. These projects will provide visible growth over the coming years. Sustainability remains integral to our strategy, our renewable round-the-clock power capacity reached 592-megawatt greenhouse gas intensity improved to 3.36 tonnes of CO2 equivalent per ton of metal from 3.93 last year. At Zinc India, Renewable Energy constituted 27% of our consumption, while our alloy business achieved 100% renewable power sourcing. We also continued creating meaningful social impact, benefiting over 9 million women and children and supporting nearly 0.5 million families through skilling initiatives. To conclude the delivery of [indiscernible] quarter with EBITDA of approximately INR 10,000 crores reflects the quality of our assets, disciplined execution and continued focus on cost leadership. With a strengthened balance sheet, industry-leading margins and multiple growth projects progressing well, we remain well positioned to deliver sustainable value for all our stakeholders. Thank you. I now hand over to Ajay.

Yes. Thank you, Arun, and good evening, everyone. I'm happy to report a record quarter for Vedanta Limited following the demerger. Strong operational execution positive prices and continued cost management enabled us to deliver a record EBITDA and robust free cash flows. More importantly, we continued to strengthen the balance sheet by further deleveraging while maintaining strong liquidity and financial flexibility. Now starting with the financial performance and practically on every single metric, it's a record number. We carried the Q1 momentum firmly into second quarter. Revenue grew by 57% of Y-o-Y to a record INR 25,812 crores. EBITDA more than doubled, up by 16% Y-o-Y to our highest ever INR 9,938 crores. EBITDA margin expanded to record about 60% without copper business, reflecting quality of our assets and focus on cost management. PAT rose by 151% Y-o-Y, again to a record INR 6,202 crores. Now in terms of the growth, which is self-funded and we are building capacities. Our operations generated free cash flow, pay growth CapEx of INR 5,803 crores in the second quarter and about INR 10,215 crores in H1. We continued to invest on our strategic growth projects with CapEx amounting to INR 1,135 crores during Q2 and INR 2,283 crores during our first half. At Zinc International, Gamsberg Phase II was commissioned during the quarter, increasing total MIC capacity to almost 500 kt. At FACOR commencement of ore extraction from Ostapal Mines underground mine makes an important milestone towards strengthening long-term old security and supporting future expansion. I'll move now to pipeline and which will also provide next leg of value creation. Looking ahead, we continue to advance a portfolio of value-accretive growth projects across businesses while maintaining a disciplined approach to allocation of capital and returns. At Zinc India, we remain committed towards our [ 2 MTPA ] production ambition supported by Butt, Debari smelter expansion and Rampur Agucha tailing reposing plant. At Zinc International, we are committed to achieving on 1 MTP MIC production and cost in top quartile. At FACOR, we are progressing our road map to expand erroneous from 145 ktpa to 500 ktpa. And finally at Copper International, the 125 ktpa copper road plant at South Arabia remains on track for commissioning in Q3 while plans for an integrated copper value chain at KCA, continues to advance. We are also continuing to build our future-facing mineral portfolio with 11 critical mine blocks of which high blocks are already under exploration. Moving on to the balance sheet. Strong cash generation drove further deleveraging. Net debt reduced in second quarter by INR 4,624 crores and about INR [ 9,500 ] crores during the first half. Now net debt is down to INR 3,625 crores, with this, the leverage net debt to EBITDA is now 0.1x amongst the best in the industry. Now Vedanta Limited is on track to turn net cash positive during the coming quarter, which is Q3. We continue to reward shareholders with a first interim dividend of INR 5 per share during the quarter. Maybe a quick word in terms of the parent company, Vedanta Resources. So at parent, with [indiscernible], we are -- we made meaningful progress in strengthening the balance sheet and optimizing liquidity profile. In H1 of the current fiscal, we raised $2.15 billion to international bond issuance in and secured another $1.85 billion of syndicated term loans. VR stand-alone net debt now stands at about $5.2 billion at an average borrowing cost of about 7.1% with avid maturity extended to over 4.5 years. The [ VEDL Rating ] remains at a decade is high both S&P and Fitch at BB, stable outlook and Moody's at Ba3 with positive outlook. In conclusion, Vedanta Limited today is focused operating company with multiple growth engines Hindustan Zinc, Zinc International, ferrochrome, copper, port and Nicomet, Together with an emerging critical is portfolio, they will decisively shape our mix of growth. Our model is very simple. We generate strong cash, reinvest to expand capacities and reward shareholders. Thank you, and over to operator.

[Operator Instructions] First question is from the line of Ashish from [ LEO Capital ].

So on Vedanta -- am I audible?

Yes, Ashish. Please go ahead.

Yes, yes. Perfect. What is likely to be the dividend policy for the -- of the company going forward? Will you be fully dividending out all the dividends received from Hindustan Link? That would be my first question.

So our dividend policy, in fact, which has been adopted by the Vedanta board post demerger is in public domain, and they made 2 changes. So earlier for Vedanta Limited, we had medium commitment of at least a 30% PAT being paid as dividend, which now has been made more flexible. Now the Board can decide how much they want to pay as a dividend. The second recent earlier was that zinc dividend will be a pass-through compulsory. Again, that requirement is the more flexible. So now it is up to the Board. Having said that, our commitment has been -- we, as a group, with Vedanta Limited, other companies paying between 3% to 5% as defend field. And with that, the parent company will keep deleveraging by at least 0.5 billion on every single year basis.

Got it. And on the second question, what sort of economics are there for the international zinc business expansion that is underway. What sort of capital investments would that take? And what sort of costs and EBITDA do you expect to -- expect that current market sizes, what likely is the payback period?

Vedanta, Zinc International, current CapEx that has been spent is for the Phase 2 expansion, which is the expansion of the mine as well as new concentrator. The concentrator has been commissioned. So that is the current status, going forward, they have to go to underground mine and then also put up a smelter as well as increased capacity of concentrator. We have that to become a 1 million tonne per year. Roughly looking from past CapEx expenditures of Hindustan Zinc, this amount of money that would be needed for growing to 1 million tonne will be anywhere from INR 80,000 crores to, maybe, INR 100,000 crores.

[Operator Instructions] Next question is from line of Indrajit Agarwal from CLSA India.

I have 3 question. First, Ajay, if you can help us, how much is the repayment at VRL both debt repayment and interest for the rest of FY '27 and in FY '28?

Yes. Sure, Indrajit. So for the current fiscal -- in the second half, the interest obligation at Vedanta Resources is almost $200 million. So it's $0.2 billion. And we also got to fund KCM about 100. So overall, in the second half, VR requirement is at 300. And how do we want to fund it? It has to be done mostly by dividend. And that amount will lead to deleveraging. So the debt of 5.2% opening at the year beginning, remains 5.2% as on the first half. And any more payment from India side even. Now FY '28, we should look at from 3 viewpoints. So we got a billion of Citibank bridge financing that matures in July next year. But we target to refinance that sometimes latest by end of January. So the 1 billion will be fully refinanced, again, a combination of bonds and other revenues. Secondly, the interest cost Vedanta Resources next year will be almost of 400 and that will be fully met by the brand fees that the 5 companies pay to with other resources. The third cohort remains the routine loans again 400 and our KCM obligation, 300, million which will be met through payment of dividend. So in summary, a $1 billion bridge loan from Citibank will get refinanced by January. Interest will be equal to the brand fee. If not, brand field is more the interest cost and loans and the case of obligation by dividend. With that, one can assume we are next year will deliver by almost $0.5 billion to $0.7 billion.

Second, x of Hindustan Zinc, what kind of CapEx can we see at Vedanta Limited in rest of FY '27 and in FY '28.

Total CapEx guidance we have for the current fiscal is about INR 6,500 crores. And out of which a very significant push impact comes from zinc only. So maybe almost INR 2,000 crores -- will be. The CapEx mostly in Zinc International and a small amount also in ferrochrome. So 4,000 in Zinc India...

And the backdrop...

INR 2,500 crore between ferrochrome and zinc contraction.

And lastly, any progress or update, I understand there are some understood still there. Middle East copper venture? Any thoughts on that?

Yes, sure. First, part of that was the rod mill, which is about to be commissioned in quarter 3 of this year, 150,000. So that is for certain. On the mining, the licensing agreement are about to be signed. And following that, we are tying up for exploration agencies being appointed, maybe under that 2 years, when by that time, we should be able to start mining operations there. Smelter is no smelter is a certainty because that's something that can be done by importing concentrate as well as producing concentrate domestically in Saudi Area, both ways.

So CapEx for that will start in FY '28 back half at the earliest?

Absolutely. Next business plan here, we'll be able to announce some CapEx so much and then guide you accordingly.

[Operator Instructions] Next question is from the line of Ashish Kejriwal from Nuvama Wealth Equities.

Sir, my question is about from when we can start seeing CapEx on the next phase of growth in Zinc International, whether we will prioritize between zinc or copper? And the second thing is in terms of Vedanta Resources debt, which is $5.2 billion. And we have been targeting it to introduce it to $2 billion,$3 billion. But unfortunately, we were able to do that. So still our target remains the same? Or is there any change in that?

So first part is Zinc International. We have to stabilize the expansion program for which already we have spent the money. Right now, the concentrator has to produce, and that will provide cash for their further growth. So I don't see that immediate any announcement for CapEx for 1 million tonnes. While we continue to work on the board, there may be some pre-project expenses of investigation, consultancy and things like that. But otherwise, our first task for the next 3 to 6 months is stabilizing the current expansion and generating enough cash from the business.

On the second part, Ashish, in terms of the VR plan. So in the current year, the 5.2, remains 5.2. And of course, there is very simple. We have to fund KCM, which we initially planned that through IPO, it will be self-funded. Again, it's a question of time when KCM goes public. Secondly, the entire INR 4.5 billion or in fact, a couple of billions of the bond raising, the expense, which are onetime are sitting in the current fiscal but the benefit on the interest cost will be for next 8 years' time. Now in the second half, as the reminder companies pay dividend, which again they will decide, will be at about 4.6 or so in terms of [indiscernible]. In the next 3 years, between 2028 and '30, one can safely assume by paying a 4% to 5% dividend, $0.5 billion to $0.7 billion will be deleveraging every single year. And over 3 years, this amount is almost $2 billion. So $3 billion target in next 3 years is absolutely intact.