Vedanta’s cost cut push is good, but some concerns linger

Despite a reasonably profitable business and prospective gains from its capex programme, Vedanta faces pressure from the debt servicing issues of its holding company, Vedanta Resources Ltd. (File Photo: Reuters)
Despite a reasonably profitable business and prospective gains from its capex programme, Vedanta faces pressure from the debt servicing issues of its holding company, Vedanta Resources Ltd. (File Photo: Reuters)

Summary

  • Vedanta is poised for growth through strategic cost-cutting and backward integration, but debt woes from its parent company, Vedanta Resources, cast a shadow over its ambitious plans.

Vedanta Ltd is betting on structural cost reductions to drive the next phase of its earnings growth. The company is heavily investing in backward integration, operational efficiencies, and captive power usage, including renewables. These measures are expected to lower production costs and minimize exposure to input price fluctuations. Vedanta, a diversified metals and mining company, operates across segments such as aluminium, zinc-lead-silver, iron iron ore & steel, among others.

The company's capital expenditure projects are primarily directed at enhancing backward integration for aluminium rather than expanding capacity. Aluminium, which contributes 34% to total revenue, holds the greatest potential for boosting the bottom line. The projects, entailing a total investment of 25,000 crore, aim to eliminate alumina import dependency, reduce bauxite import dependency to 35%, and increase the share of value-added products from 60% to 90%.

 

“A 100% captive alumina, 100% captive coal and 65% captive bauxite shall help Vedanta sustain Ebitda of $800-1,155 per tonne on aluminium price of $2,100-2,600 per tonne by FY27, against FY19-24 average Ebitda of $437 per tonne," estimates Nuvama Research. Ebitda is earnings before interest, tax, depreciation and amortization.

Read This: Vedanta to raise $470 million from Power Finance Corp for energy business

The first phase of the alumina capacity expansion was completed in Q4 FY24, and the second phase commissioning is expected in Q2 FY25. Vedanta is also increasing its capacity for producing value-added grades of aluminium. Vedanta’s aluminium segment Ebitda is expected to double from current 9,700 crore to 19,100 crore, according to analysts at JP Morgan India Pvt. Ltd. Consolidated Ebitda is likely to increase by 60% by FY26.

Capex plans and debt challenges

Other capex includes doubling the mining capacity of the international zinc business, expanding steelmaking capacity, and investing in oil and gas exploration. In FY24, the company invested a total of 12,000 crore and has lined up investments worth 16,000 crore in FY25.

Despite a reasonably profitable business and prospective gains from its capex programme, Vedanta faces pressure from the debt servicing issues of its holding company, Vedanta Resources Ltd (VRL). VRL confronted the threat of default with a debt repayment obligation of $4.5 billion for FY25 and FY26 without sufficient cash inflows. It secured a reprieve from lenders by restructuring $3.5 billion of debt in January. VRL has also pledged 100% of its holding in Vedanta.

Read This: An iceberg of debt appears to threaten Vedanta Resources

VRL’s financial stress has resulted in a push for higher dividends from Vedanta, totalling over 11,000 crore in FY24. Vedanta’s net debt at the end of FY24 stood at over 56,000 crore, although, lower than 62,000 at the end of the December 2023 quarter. However, against the backdrop of a large capex plan and holding company’s push to give higher dividend, monitoring the trajectory of net debt is important.

Also, Vedanta had announced its plan to divest its iron ore & steel business to reduce the debt burden in early October 2023. There has been little progress on this, and the company might be waiting for the demerger process to be complete before taking a call on the sale.

Vedanta has a complex business structure operating through several subsidiaries and divisions. To simplify the structure and unlock value, it announced its plan to split the company into six separate entities in September last year. The process is expected to be completed by the end of FY25.

More Here | Vedanta demerger: Key lenders signal green light after months of deliberation

Meanwhile, in this calendar year so far, Vedanta’s stock price has risen 83%, outpacing the Nifty50 index. Hereon, timely execution of growth and backward integration projects, progress on strategic actions/demerger, and headway towards deleveraging will assume further importance for stock performance, according to an Axis Securities report.

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