Q1FY24 Review: Vedanta: Needs of parent taking toll

24 Jul 2023 , 12:38 PM

VDL’s Q1 Ebitda at Rs64.2bn was in-line with IIFLe but the key negative was the increasing burden from deleveraging needs of VRL. While net debt has risen to Rs592bn (1.9x ND/Ebitda) led by elevated dividend payouts, company in Q1 also extended maturity of US$449 balance ICL (to VRL) to Dec-24 and has approved a higher brand fee of 3% w.e.f April-23 vs. 2% earlier. This combined with a weaker LME Zn outlook drives 7- 9% cut to analysts of IIFL Capital Services FY24-25 estimates. They downgrade to REDUCE.

In-line Q1: 

VDL’s Q1 Ebitda of Rs64.2bn (down over 30% QoQ and YoY) was largely inline. HZL and Zinc Intl beat IIFLe aided by higher fall in COP (thermal coal). But this was offset by miss in Al business (includes power as single segment now) where COP fall at 6% QoQ missed estimates due to higher Alumina CoP. Volumes across Zinc and Aluminium business were on track but O&G business continued to see weakness with production dropping to the lowest seen at 134kboepd. Q1 PAT of Rs26.4bn benefited from exceptional gain of Rs17.8bn as OCRPS in Zinc Intl held by parent was replaced with an external debt.

Debt servicing needs of parent VRL taking toll: 

While elevated dividends has flown through to minorities, net debt has risen to Rs592bn (1.9x ND/Ebitda) amid all round weakness in commodity prices. Company has also extended the maturity of the balance US$449m inter-company loan to parent VRL to 31-Dec-24 (albeit at a higher RoI of 17%) despite maintaining all through that ICL would be wound down as per schedule and no incremental amount would be issued. Brand fee paid to VRL has also been raised to 3% (w.e.f April23) vs 2% earlier and is paid at start of year based on estimated rev.

Analysts of IIFL Capital Services cut estimates: 

Amid a weaker price outlook given uncertain demand, improving supplies and falling CoP, analysts of IIFL Capital Services cut their estimates for LME Zn. This along with higher brand fee drives 7-9% cut to FY24-25 estimates. They downgrade the stock to REDUCE given weaker balance sheet and consistent need to support deleveraging at VRL level. Capex for new ventures (display fab, semiconductors) will take further toll when announced.