Vedanta Limited

Thank you, operator, and good evening, ladies and gentlemen. Thank you for joining us today to discuss the first quarter results of FY '22.

This quarter has been a good for start to the year. The call will be held by our Group CEO, Mr.

Sunil Duggal; and Group Deputy CFO, Mr. Ajay Goel with several of our business leaders; Mr.

Prachur Shah from Oil & Gas; Mr. Arun Misra from Hindustan Zinc; and Mr.

Sauvick Mazumdar from Iron Ore and Steel. Mr.

Duggal and Mr. Goel will be discussing the operational and financial updates for the quarter, followed by a Q&A session.

Now I would like to invite Mr. Sunil Duggal to present the results.

Over to you, Mr. Duggal.

Thank you, Raksha. So good evening, ladies and gentlemen, and welcome to Vedanta Limited FY 2022 first quarter earnings conference call.

I'm happy to announce another strong quarter with continued momentum across all businesses. We were able to deliver our best by relying on our talent pool, asset-based, digital-first approach, continued focus on cost discipline and commitment to our core value of ESG, which is our fundamental.

We remain hopeful that post-pandemic, India's recovery is likely to be quick with strong GDP growth. Global commodity demand continued to be strong as global economy, particularly the advanced economy, gain momentum, while supply side constraints remain leading to metal prices touching multi-year highs.

Oil prices are supported by gradual increase in demand, focused on investment in green energy. Infrastructure and sustainable mobility will provide strong support to demand for commodities like steel, aluminum at Vedanta, aluminum, lead, zinc and copper, while oil demand to strengthen from increasing mobility.

Government continued thrust on infrastructure spending, incentivizing manufacturing and easy availability of credit will increase commodity demand in the coming quarters and more states progressively unlock restrictions. Consumer demand is set to come back in quarter two.

Coming on to Slide #5. The second wave of COVID-19 struck India hard and impacted economy recovery as country went into localized lockdowns.

We undertook several measures to help… [Technical Difficulty]

I can't hear Mr. Duggal dropped out or…

I am also there. I think Mr.

Duggal's like got dropped.

Yes.

So I'm sorry. Sorry, guys.

We got disconnected, but I'm not sure where I got disconnected. So I'll just repeat a couple of paragraphs.

So government continued thrust on infrastructure spending. Incentivizing manufacturing and easy availability of credit will increase commodity demand.

As more states progressively unlock restrictions, consumer demand is set to come back in quarter two. The second wave of COVID-19 struck India hard and impacted economy recovery as country went into localized lockdowns across the country.

We undertook several measures to help over 4.5-lakh people in over 500 villages by providing vaccines, oxygen, medical equipment, test kits, PPE kits, medicines and sanitizers. With permission from the Supreme Court, we started the oxygen plant at Sterlite Copper, which has supplied around 1,400-ton medical oxygen to hospitals around our location free of costs, taking the total oxygen supplied by the group to 2,2 50 tons approximately.

Coming to Slide #6 and 7 now. At Vedanta, we believe in giving back to the society and being the developer of choice by communities.

Anil Agarwal Foundation, the umbrella entity for Vedanta's giving back to initiative, has rolled out INR5,000 crores. Social impact program is focused on nutrition, women and child development, healthcare, animal healthcare and grassroot level for improving investment in a corona-free village project across several states to combat the pandemic.

As part of this initiative and with an aim to tackle expected third wave, we have started Swasth Gaon Abhiyaan across 1,000 villages in 11 states, touching lives of about 20-lakh people by conducting vaccination drives, supplying oxygen and providing medical and diagnostic infrastructure, among other things. Coming to Slide #8.

As the world is slowly getting back to normal, we are determined not to let our guards down. Call centers or passports headed by the business CEOs continue to monitor the situation on ground.

We are well prepared to assist our internal ecosystem in case of any unanticipated third wave. We have deployed all required medical support and infrastructure at our site, along with hospital tie-ups for any emergencies.

Testing and vaccination of all our employees, business partners and their families are ongoing as we speak. We are prepared to go the extra mile to ensure welfare of our employees and communities.

Coming to Slide #9. We are saddened by the loss of two lives at Zinc India this quarter.

We have completed in-depth incident investigation for the fatalities. The learnings from the incident are being reviewed by our employees and business partners for implementation across business units and are being tracked and monitored at ExCo level.

Safety continues to be our high-end focus as we aim to achieve zero harm and ensure that everyone goes home safe at the end of each day. Achieving our safety mission, we have fatality learning program through ICAM training.

We have also improved our safety inflection all the way to senior leadership level through visible strength leadership. Coming on to decarbonization.

We are developing a net zero road map with a concrete action plan until 2030 to be rolled out in the next six months. This includes risk assessment, developing science-based targets, carbon pricing and revamping our energy mix.

We continue to analyze and monitor environmental risk as a result of our operations and aim to achieve a net zero impact on the environment. We are also identifying areas within each business, wherein we plan to launch Net Zero Pilot program to achieve early success, which can be scaled up.

Turning to Slide #10 and 11. Turning to our key operational and financial highlights of the quarter.

We continue to deliver strong production performance across all businesses, along with continued focus on lowering cost. Special mention to Aluminum, Zinc International and FACOR, where we'll continue to achieve new levels of production with continued focus on structural reduction in cost and better capital management.

This quarter, we closed record revenue of INR28,105 crores and highest ever EBITDA of INR10,032 crores, with a robust EBITDA margin of 31%. The net debt has come down by INR7,000 crores from June last year, which shows the strength of our balance sheet.

Vedanta's diversified product portfolio puts us at a sweet spot with production ramping up across all our businesses, with recent ferrochrome and met coke addition strengthening the portfolio further. We remain focused on achieving potential production across businesses from our existing resources and enhancing performance via technology leverage discipline.

Coming to Slide #12. We have reoriented our management structure and are focused on following key value drivers.

In each of these areas, various initiatives are being strategically driven to unlock further value for the Company. Upholding our core commitment to ESG, we are updating the Board Sustainability Committee to Board ESG committee to strengthen Board-level record and advice into all aspects of ESG.

We remain committed to provide equal opportunities to employees regardless of their race, nationality, region, caste, creed, gender or age, set up center of excellence with R&D as foundation to leverage technology and improve asset base. We will also unlock value through integrated procurement and marketing; establish digital transformation task force to improve efficiency across businesses, including initiatives for risk monitoring and analysis.

Exploration and reserve growth is the key focus area for all our verticals. We are working on various greenfield projects.

A few examples: execution of Thanewasna copper block in the next couple of weeks with drilling expected to start in next four weeks post monsoon. Extension brand of Dubarpeth from Government of Maharashtra expected shortly, expected to get forest permission to drill 18 bore holes through BCL, Baghmara coal block Chhattisgarh, forest approval received in the process of executing a stated commencement of exploration in current quarter.

And second, we have onboarded and exploration partners where drilling has commenced with expected total R&R addition of 10.54 million tons based on Q1 exploration. We continue to work towards assessing new mining does and expanding partnership to stand and R&R base.

Coming to Slide #13. Turning to our business verticals.

Aluminum business, we witnessed an exceptional quarter, highest ever hot metal production of 549 kt, which was up 17% Y-o-Y. Landing of cost of production was at $258 per ton; and aluminum cost of production, $1,526 per ton, up due to input commodity headwinds.

This quarter saw highest-ever EBITDA margin of 36%, making aluminum business almost equivalent to the highest contribution to EBITDA at our group level. We have emerged as a successful bidder for the Kuraloi north coal block in Orissa.

The operationalization of our coal blocks, Jamkhani, Radhikapur and Kuraloi North will be one of our key focus in high priority areas as this will ensure almost 100% of the coal security for the business with the potential to bring down coal cost by around 30% to 35%. Turning to Slide #14.

In our effort to be among the top global leaders in aluminum with sustainable Tier 1 cost structure, we are undertaking the expansion of BALCO smelter from 0.57 million ton to 1 million ton, taking the total VAP capacity at BALCO to more than 90% maximizing, the NEP. The Line 6 ramp-up in Jharsuguda will take total capacity to 2.8 million tons per annum.

The ramping up of alumina refinery from 2 million to 5 million ton per annum is on track, which will move us towards our vision to be vertically integrated across entire value chain. Coming to Slide #15.

On Zinc India, one of the key pillars of our business, it has been delivering consistently on volumes despite the challenging times. We delivered one of its strongest first quarter.

Mine metal production stood at to 221 kt, up 9%, with metal production at 236 kt, up 17%; and slow production at 161 kt, up 37% Y-o-Y. Zinc cost of production stood at $1,070 per ton, higher on account of commodity prices, mainly coal, cement and diesel.

We look at a stronger year ahead on the back of fully commissioned projects, digital initiatives and structural efficiency improvement. Am I not audible?

Hello?

Sir, you are audible

Okay. I just thought, let me check.

We look at a stronger year ahead on the back of fully commissioned projects, digital initiatives and structural efficiency improvement. The shafts at Rampura Agucha mine and Sindesar Khurd are fully operational.

Moreover, increased use of advanced process controller at both SD and RD mills for purpose of grinding are use to improve recoveries. This year, there is an increased focus to increase our reserve base by upgrading resources.

We are leveraging advanced surface and geophysical technology to achieve the targets. Owing to Zinc International business, Gamsberg mine is setting new records with its excellent performance for building highest-ever MIC of 46 kt in the quarter, up 84% Y-o-Y, on way to achieve the target up to 50 kt, which is more than the design testing.

It also demonstrated several net performances like highest mill throughout, mill utilization and ore treatment. Coal reduction trajectory of Gamsberg continue with COP of $1,299 per ton in quarter one from $1,350 per ton in quarter four FY '21, through effective plant maintenance and monitoring, internal efficiency and digital initiatives, apart from recovery improvement.

We are confident of achieving the target driven by the capacity enhancement project at Gamsberg. Plan to ramp up mining by 3x in FY '22 to more than 75 million ton versus 24 million tons in FY '21, four additional mining business partners have been onboarded, ongoing project to remove debottleneck or zinc production to achieve 600 ton per hour mill throughput and expansion of rougher circuit to improve recovery.

Reagent additional project to run at 600 ton per hour. BMM produced about 15 kt MIC in quarter one.

It has started a new scalable product line of magnetite. Advanced step towards developing a 3 million ton per annum iron ore project are being undertaken, with the first production seen from the pilot plant already started.

Phase 1 of this project expects to produce between 0.7 million to 1 million ton of iron ore. Vedanta is well positioned to undertake next phase of growth, in line with the vision to become a 1 million ton producer.

With robust R&R of 30 million ton of metal and proven track record, ZI is embarking on expansion projects, Gamsberg Phase 2 to almost double production of existing Gamsberg mine from 240 kt to 450 kt. Conversion and expansion of refinery at Skorpion Zinc Namibia to produce 300 ktpa fine metal from sulfide ore Gamsberg.

Drilling has also commenced at Gamsberg 2 and Swartberg 2 significant drill targets have been identified through deep looking magnetotelluric geophysics technology. Coming to Slide #18.

On our oil and gas business, gross oil and gas operated production during the first quarter was 165 kboepd. Gas sales were impacted due to reduced demand during the first two months.

This was normalized during June, and we exited the quarter at 170 kboepd. Gas production has ramped up with a new terminal now fully operational.

We have onboarded O&M partner to manage the gas processing facility to improve operational efficiency and also enable us to focus on R&R addition. All wells for Aishwariya Barmer Hill have been drill and volume ramped up.

The polymer injection has been ramped up to the design capacity. Coming to Slide #19.

For the current year, we have planned CapEx investment with twofold objective adding near-term volumes and a sold-through exploration. We plan to spend around $200 million to monetize 40 million barrels of results.

Infill drilling has been commenced in Mangala. Drilling and tight oil, tight gas and offshore shall commence progressively from quarter two.

We intend to spend around $150 million to grow the resource portfolio. Our 15 well drilling program in OALP, we have drilled four wells already.

And currently, drilling is ongoing in Cambay and North-East. We expect to commence exploratory drilling in Rajasthan and Ravva block during the current year.

Coming to Slide #20 and moving to iron ore business. Karnataka saw highest-ever margin supported by strong domestic iron ore prices and focused on value-added products through strength in full value due to trade barriers.

Sales were consistent with, while the production was up 53% Y-o-Y. For Goa mines, we are engaged with state and central government for favorable ruling for resumption of mining.

At value-added segment, we achieved the highest-ever quarterly hot metal production of 202 kt due to productivity improvement, and margin improved to $184 per ton, which was up 6x Y-o-Y. We are also very happy to announce integration of our recently acquired coal plant, having a capacity of 0.9 million tons per annum in Gujarat, making Vedanta largest merchant coke player in the country, taking the capacity to more than 1 million tons.

Coming to Slide 21. Steel business recorded quarterly saleable production of 289 kt, up 8% Y-o-Y, with a margin of $115 per ton.

The sales were at 265 kt for the quarter, down 13% Y-o-Y due to challenging domestic condition amidst the second wave of COVID. The VAP mix decreased in quarter one to 75%.

However, our focus remains to achieve more than 90% in FY '22. We are tracked to double hot metal capacity to 3 million tons per annum in the next 16 to 18 months' time.

Debottlenecking of existing blast furnace is planned in October. Upgradation of other unfinished facilities with technology, automation, digitization are ongoing for productivity improvement and capacity enhancements.

Turning to Slide #22. FACOR is continuing its turnaround story, has seen 3x growth in ore production in comparison to last year.

In fact, this quarter witnessed highest-ever ore production. Plant productivity has increased by 11% post the annual maintenance shutdown in April.

We have completed several efficiency initiatives like debottlenecking of furnace and optimization of stable ferrochrome production. We further plan on increasing the productivity through various debottlenecking and technological initiatives.

With this now, I would like to hand over the mic my colleague and friend, Mr. Ajay Goel, for the financial summary.

Over to you, Ajay.

Yes. Thank you, Sunil, and good evening, everyone.

We have delivered yet another very strong quarter, and Q1 has been an outstanding start of the year, both operationally and financially. This quarter witnessed our best-ever quarterly EBITDA performance and very low net debt-to-EBITDA ratio.

This quarter, we also made investments in various futuristic CapEx projects, augmented digital and people capabilities and supported society very well in this tumultuous times. Some of the key highlights of the quarter from Page 24 are highest-ever quarterly EBITDA of INR10,032 crores, up 150% Y-o-Y, with an underlying EBITDA margin of 41% being an industry-leading margin.

Attributable PAT, before exceptional items, stands at INR4,280 crores, up 314% Y-o-Y. ROCE, return on capital employed, at 22%.

This is up 375 basis points versus last quarter sequentially. Gross debt stands at INR51,579 crores and with cash and cash equivalents of INR31,318 crores shows underlying very strong liquidity position on the balance sheet.

Net debt of INR20,261 crores, down 26% Y-o-Y, and that is almost INR7,000 crores with annualized net debt-to-EBITDA ratio of 0.6x, continues to be lowest amongst ending peers. I want to underscore that 0.6x ratio means that almost with the seven months of profitability we can repay the entire net debt on the balance sheet.

You may have seen that we have a detailed income statement in the appendix on Page 31. I want to call out a couple of vital few numbers for your benefit.

Starting with the business in charge for the quarter at INR2,124 crores, it is higher by 23% Y-o-Y primarily due to capitalization of major projects, especially at oil and gas and higher ore volumes and capitalization at zinc and aluminum businesses. The numbers quarter-on-quarter, it is marginally higher by 3% due to capitalization at oil and gas and higher ore production at our Zinc International business.

Finance costs for Q1 was INR1,182 crores, down 6% Y-o-Y and down 11% quarter-on-quarter, due to lower average borrowings, partly offset by higher interest costs. The average cost for the quarter stands at about 8.1%.

Income from investment for the quarter at INR726 crores, down 29% Y-o-Y, mainly on account of mark-to-market movement and 16% lower quarter-on-quarter, primarily due to change in mix of investments. The average income from investment for the quarter stands at about 5.3% pretax on the current portfolio.

The normalized ETR, effective tax rate, stands at 26% versus 28% in the previous quarter on account of change in profit mix within entities in our portfolio. As you know, normalized ETR excludes any tax on exceptional items, tax on inter dividend and onetime deferred tax asset that we recognized almost INR3,000 crores in the previous quarter from integration of our ESL from the previous losses in the fourth quarter.

I now move to EBITDA bridge. Now starting with the EBITDA bridge, first, Y-o-Y versus last year on Page 25.

As you can see on this chart, in summary, significant portion of EBITDA increase of INR6,000 crores from INR4,000 crores last year same quarter to INR10,000 crores this quarter has been market or pricing driven, both LME and Brent. The increase in volumes at zinc, aluminum and iron ore has been partly offset by cost mitigation and aluminum business which again is marked to market.

Overall, the absolute EBITDA for the quarter, vis-a-vis last year same quarter, has gone up 2.5x, which I think is quite commendable. Moving on to the EBITDA bridge sequentially on Page 26 vis-a-vis the previous quarter.

EBITDA for the quarter is higher by 10% quarter-on-quarter. As evident from the bridge, the market or LME and various regulatory factors have positive impact on our EBITDA by INR1,659 crores with commodity pricing alone giving gain of INR1,928 crores.

This is partly offset by input commodity inflation majorly at aluminum and ESL. On the operational front, lower volumes at Zinc and… [Technical Difficulty]

Yes. Thank you, operator, for that.

I was at EBITDA break sequentially, which is on Page 26. EBITDA for the quarter is higher by 10% quarter-on-quarter.

Now as we can see from the bridge, the market and LME factors have positively impacted our EBITDA by INR1,669 crores and the pricing alone, giving almost a gain of INR1,928 crores. This is partly offset by input inflation, majorly at aluminum and ESM.

On the operation front, lower volumes at zinc and iron and steel business has impacted EBITDA by INR705 crores. Overall, the higher metal pricing and the Brent and inflation on input side has been the major things, both quarter-on-quarter and Y-o-Y, both different managing.

Moving on now to the next page on net debt side on Page 27. Net debt as of June 30 stands at INR20,261 crores shown a decrease in [technical difficulty] -- showing a decrease of net debt by INR4,152 crores sequentially and deleveraging versus last year is almost INR7,000 crores, almost 26%.

Just to recheck, I hope I'm audible.

Okay. I will continue.

The decrease in net debt is attributable to positive free cash flows post CapEx almost INR30,800 crores as a result of strong operational performance; and secondly, also a receipt of almost INR5,000 crores on account of intercorporate loans that we got repaid from Vedanta Resources Limited. Finally, moving on to the balance sheet, last page, Page number 28.

We remain highly focused on managing our balance sheet efficiently and has a very strong position in terms of cash and investment totaling to almost INR31,000 crores plus. The average maturity of term debt is almost three years, with average borrowing cost at 8.1% for the quarter.

The rating has remained constant as in the previous quarter, with a stable outlook from India Ratings. With net debt to EBITDA at 0.6x, we are amongst the lowest in Indian peers by a long margin.

Overall, in summary, with an excellent Q1 performance and structural improvement in volumes across businesses, we delivered both profitability and deleveraging and we believe a stronger balance sheet as in the quarter end when where we begin. This sets us to deliver a very strong year performance.

Thank you. And with that, I hand over back to Sunil for wrapping before Q&A.

Thank you, Ajay. Before we open the floor for question and answer, I would like to reiterate our strategic priorities and vision that will drive our long-term value.

Number one, vision of becoming world-class ESG organization; two, strengthen our reserve and resource base to enable growth; three, strong focus on operational excellence and cost leadership; four, maintain strong balance sheet and optimal capital future; five, continue delivering value-added growth in all our businesses. Now, I declare the floor open for question and answer.

Over to you, operator.

Thanks a lot for the opportunity and congratulations for a good set of numbers. I have two questions.

The first one is your expansion plan at BALCO, 414 ktpa. Now what kind of ROE or ROIC do you envisage from this expansion?

Because one of your competitors in India is diversity setting -- expanding this primary aluminum capacity while you are going ahead and doing it. So I just wanted to understand the thought process behind it.

No, I think we wanted to go to 1 million tons up at BALCO, and we also wanted to realize our region of 3 million tons production. And with the infrastructure focus and the growth of green metal demand aluminum, I think, the demand is going to grow in India.

And by making and adding the capacity, which is 100%, almost 100% value-added product, I think, we can come to the first decile of the cost curve with our structural measures around securing our bauxite security, raising the Lanjigarh capacity from 2 million ton to 5 million ton with a potential to go to 6 million ton. We are also in the process of taking the approval for 6 million ton from MoEF and then operationalization of the coal blocks.

Just to also let you know that the recent coal block, we could lay coal block, which we have just won. The potential cost of the coal is around 40% to 43% on UCB compared to our existing cost of 74% to 75%.

And securing coal from three coal blocks, which we have already won, it almost gives us the 100% coal security. With all those structural measures in place and adding the value-added capacity at Jharsuguda and the previous quarter also, the capacity, which we have declared at BALCO.

And with this expansion with the 100% value-added capacity, I think, the aluminum business is on par to 3 million tons, contributing $3 billion EBITDA to our kt. And we are quite excited and motivated to announce this expansion.

So just wanted to understand the ROE, ROIC estimate if you have put any on for this particular expansion?

Ajay?

No, sure. I think you heard from Sunil that this bulk of project is quite extradition, and we will be entering the one MTPA club very soon.

Now as you know, the entire growth of this market is about a 7% to 8% CAGR, so this is a building capacity for the future. It is showing seed for next generation.

Now, the entire project has very healthy with the financials. If I look at maybe IRR as a key metric that we normally track, it is between 20% and 25%, depending to where LME will rest.

So 20%-plus is, for sure, is IRR is quite strong. Payback is another set while looking at this kind of project.

So between 4 to 4.5 years is a real payback on this project. We offer multiple scenarios in terms of going up, going down, if we overrun.

Overall, looking at multiple scenarios, the project is a well stress-tested, and 20%-plus IRR 4, 4.5 years is a payback.

But I also want to add on. This IRR is worked on a very conservative cost number, which is the existing cost.

With the structural measures, which I have just said, the oxide security Lanjigarh capacity going up, operationalization of the coal blocks and our value-added product, I think the MSR potential going up from the current level, if the LME remains at the same level, we have a potential of around $300 to $400 additional MSR contribution from this business.

Understood. And further elaborate, the second question is on your aluminum waterfall chart that is on Slide #39.

Now if I see the cost elements, everything has increased Q-o-Q, except conversion cost and others. So is there some RPO obligation write-back that is responsible for this decline from $101 per ton to $64?

Or I mean, what are the drivers for this decline?

No, there is no write-back as such. There's no RPO that's in this cost.

Okay. So, it's purely the efficiency factors that are integrated in this?

Absolutely.

Okay, great. Thanks very much.

I’ll have more questions while come back in the queue.

Thank you.

Yes. Hi, good evening, everyone.

So, two questions for me. One is, what's your plan for net debt position of company ex Hindustan Zinc because in this quarter also, if you see that ex Hindustan Zinc, our net debt has declined both by 2,000 crores, and out of that 1,500 crore -- the fully 500 crore decline on our EBITDA of around 6,400 crore.So…

Is he on call?

Yes. Hello?

Okay, fine. Good evening.

So my question was on net debt position of company ex Hindustan Zinc, where we are seeing that it has declined just by INR2,000 crore on a quarter-on-quarter basis. And out of that, around INR1,500 crores is the ICD payment by the parent company.

The fully INR500 crores decline in net debt ex Hindustan Zinc. So my question is, how do we see ex Hindustan Zinc net debt terming out throughout the year?

That is question one. And secondly, you talked about the coal block.

So, all these three coal blocks, when do we think that will start contributing and giving some kind of advantage in the coal total power cost as well as what's the CapEx plan for BALCO, and we are expecting how much CapEx will do? Thank you.

No, I think all these three coal blocks. We are on a drawing board and working out the numbers for operationalization of all these coal blocks.

So my rough estimate is that we will have to spend around INR3,000 crores for operationalization of all the coal blocks. And my own sense is that we are in the process of taking some approvals and then land rights and working out AMD model in discussion with various parties or potential vendors.

So this could become operational in the next 12 to 18 months' time, with a rough CapEx estimate of around INR3,000 crores. On net debt of Hindustan Zinc, again, yes, sure.

So if you read maybe two charts in our presentation, Page #27 on net debt position and the Page #32 that shows our cash position by entity. See, the deleveraging, if you look at numbers quarter-on-quarter between March and June, our net debt has gone down by almost INR4,200 crores.

The contribution by Hindustan Zinc is almost INR2,000 crores, and the remainder is from different entities. So it is half and half.

So that's what I was saying, sir, but half or INR1,500 crore is just the ICD repayment by the parent. So from operating cash flows of ex Hindustan Zinc, we were able to reduce net debt by INR500 crores only.

I think you're right. The number is about -- thereabout, about INR70-odd crores.

You're right.

Yes. So my question on that was that how do we see ex Hindustan Zinc net debt coming down throughout the year?

I mean, as you know, we don't give guidance in terms of net debt or the cash flow for the fiscal. But one can look at the numbers.

If you look at our fourth quarter, the cash flow generation, and for the Q1, historically, in our industry and in our company in Vedanta, typically, the first quarter is a cash investment. I mean that is how the business cycle -- that is how the entire debtors and inventory really works.

Maybe the first time in the recent past, we are looking at deleveraging in the first quarter. I think by each passing quarter, and I don't need to give guidance, but the volume in the second quarter should be higher than the first quarter, it need to go up.

So with the higher volume quarter-on-quarter, cost compression and assuming LVs continues, EBITDA for the current fiscal will be far higher than the last year, and even that led to significant cash flows. So we should be looking at significant deleveraging in the current fiscal.

The exact number, I do appreciate, it is hard to provide for now.

Sure, sure. And sir, that question was the CapEx for BALCO 400 kt expansion?

So around INR6,600 crores.

Thank you very much. So my first question relates to the BALCO expansion.

In terms of the 0.4 million tons aluminum smelter, would there be any additional power capacity be set up? And if so, what kind of capacity would that be?

No, I don't think any additional thoughts best be required. We don't need any power infrastructure.

We don't need any water interest. The advantage is that our sufficiency from our current power plant and converting IPP to CPP will be good enough to meet demand or the expected capacity.

So essentially, we should expect, sir, the power sales that we are currently seeing at BALCO of roughly 400 million units a quarter, that would reduce as and when the smelter comes online?

Obviously. Obviously.

Okay. Sir, my second question relates to the oil segment.

So the oil realizations were up roughly around 10% Q-on-Q. And we also had flattish volumes and a slightly lower COP, but the EBITDA has actually come off marginally in this quarter.

So how should we look at that?

Say it again? How did it come?

Sir, the oil segment EBITDA were at INR1,064 crores is actually lower on a Q-on-Q basis, Q1 versus Q4, even as the oil realization is $67, is around $7 higher versus the fourth quarter, oil production is flat. So even with higher oil price list, sir, and flat volumes, why is the EBITDA lower sequentially?

So the EBITDA lower sequentially is really on account of our PP trend, which has increased from 30% to 50%. That has given some impact on the EBITDA.

And sir, this will be recurring?

Yes. So we are in the 50% tranche for the year FY '22, and we'll continue with that.

It is now at roughly 60%. As per the agreement, this has gone up from 40% to 50%.

So minimum will be 50%, but it has also got a formula investment multiple, that means the CapEx spend. As a result of that, it could vary from 50% to 60%.

We are at a highest tranche because of the investment multiple. But if the investment goes higher, as a result of which the volume could go higher, and PP could come down to 50% going forward.

Understood, sir. And just to continue with this oil, there was an other expense of oil exploration wells being written off of INR99 crores in this quarter.

Historically, we have not seen that kind of an expense, sir. So sir, what is the kind of inventory of exploration wells, which is sitting on the balance sheet and could get expensed off in the P&L going forward?

No, you see these are all wells. We have budgeted 15 wells for exploration.

And you know in the exploration that not that every will get the success. So we have drilled four wells.

Out of that, three wells have been found right, but one well has given the success through which we are commercializing the direction. We are in the process of drilling more wells.

And as a process, when the wells get dry or we find these dry wells, we have to write off this cost. So, it is a very standard SOP, which is followed.

Sir, first question is on capital allocation. I wanted to hear your thoughts on copper smelter, fertilizer plant at Hindustan Zinc and oil refining business, and lastly, a general divestment?

That's the first question on capital allocation.

So capital allocation, we have budgeted $1.8 billion, in which project CapEx and sustaining CapEx, both are included. But apart from that, the project which we have declared today is part of that investment could also come.

But all in all, I think for the current year, the CapEx investment should remain at not more than $2 billion. Apart from that, whatever projects you were talking, we are in the process of evaluating this, all these projects and on our grind board to do the complete design and the final design.

And in the copper smelter also, you know that we had issued the UI. And we got the interest from the coastal states, three coastal states.

We are in discussion with them. But we have not conceptualized or finalized anything as we will conceptualize or finalize anything.

We will come back to you, and we will announce at the right time.

Sure. Sir, my second question is on dividend payout.

I was just looking at the Vedanta Resources bond holding. On 16th of July, Vedanta Resources terminated the consent solicitation with respect to two bonds that is 2024 to 2025.

I understand basically the guarantees are not only from VRL but also from [indiscernible]. So just wanted to understand, given this consent has got terminated, what is the reputation it could have?

Or how should one relate to the dividend payouts from Vedanta to the parent?

Yes, sure. So the two parts, if you starting is the first, that bond content.

We think the overall seeing the bond consent is a positive for all the stakeholders. And it's part of our continuous efforts in terms of various initiatives.

Now we can't attribute this to any one specific initiative. Now looking at the response from the bondholders, we think at this stage, it is not in our best interest to hope for this conference.

And hence, Vedanta has called off this bond content. The second question is to look at the payment of dividends, and I know you are tracking Vedanta quite well.

Our dividend even has been amongst the highest in the industry. Now if you look at the current fiscal with the higher profitability, driven by both the volumes and the prices and resultant EBITDA, I think a stronger free cash flow is a given.

If you look at the first quarter and maybe the last quarter, the balance sheet strengthening remains our single biggest priority. And the proof you might have seen, almost INR7,000 crores, almost 1 billion deleveraging Y-o-Y.

But with a strong performance and the improvement in the coal situation, I think it is fair to also assume that in the near future, the payment of dividend is an option. Would that be happening in the next quarter or the quarter next, we have to wait and watch.

Secondly, also deleveraging at Vedanta Resources is one priority. That, again, will be from payment of dividend, which may be from both operating flows and even at some kind of leverage at Vedanta Limited.

So deleveraging at Vedanta Resources, it's through payment of dividend, both through operating free current cash flow and the borrowing is an option in your future.

Sir, just to continue with this, how should one look at the growth CapEx versus the balance sheet ratios? Like we have indicated net debt to EBITDA is the best in last four years at 0.66.

So how should one look at growth CapEx versus the balance sheet ratios that we are looking at versus the dividend payout?

So I mean, you may have seen our CapEx guideline for the current fiscal is almost 1.1, 1.2 gross CapEx. Additionally, almost 0.7 billion or 0.8 billion is sustaining CapEx, so overall CapEx for the current fiscal, almost 1.8 billion to 2 billion.

Historically, we have never exited our CapEx guidance; and we are quite conservative, we are quite rigorous in terms of putting for CapEx figures. Now typically, our net debt-to-EBITDA, historically last five years, is in the range of 0.9 to almost 1x.

Right now, 0.66x, I think by far the best in the Indian peers. If you're asking about will that sustain?

I think 0.6 might be too low, but again, 0.9 or 1 is too high. Unforeseen at the current fiscal, including the year-end, it must be in that huge spot of almost 0.7 to 0.75x.

Just continuing on the previous question on dividend, I just want to understand that for the cash flow, what is the deadline for us to get the tax shield on the dividend income we received from Hindustan Zinc for this year?

Well, as you may have seen the current fiscal, there is no dividend for Hindustan Zinc and typically, as you know, Section 18 and income tax rate. So we have to pass on the dividend from our subsidiary to our parent company within the same fiscal.

So whatever amount we get in the near future, if at all, any payment is happening, we have to pass on that to the parent in the same fiscal.

Okay. But my understanding was we get a tax shield or tax credit, whatever you call, in the tax filing of next fiscal.

So is that right? I mean I thought November is the deadline normally.

I think it was also discussed in earlier calls. But you are saying that the tax rate for last year's dividend is lost.

So we don't have that.

Income?

Yes.

Sorry.

Yes, I am connected.

Yes. Again, is the question clear or should I repeat?

No, no, I heard you. I'm not sure if you can hear me fully.

I think the line is up. What I was saying is the timeline to get the entire dividend is in before one month, we sign the return.

So it's time on the news at 30th November, then we must pass on the entire dividend by October 31.

We have time to vote.

Okay. And did we get any COVID-19-led extension of the timeline last year?

Or any extension of this timeline expected this year because of the COVID situation?

We don't know.

Right now that is hard to say what the government will do, but it is quite possible they might extend. But we have bought a respective time with operations

Got it. Got it.

That's very clear. Second question is with respect to steel, the expansion of 1.5 million to 3 million tons.

What sort of CapEx and the timeline we are looking at? And secondly, are we looking to just add hotel or some downstream as well?

No, actually, this is a CapEx, which is a half-finished project when we took out this company, I think there were a lot of equipment which were installed. It's a half-finished project.

So, we are balancing -- putting all balancing equipments and completing the project and this will take the capacity to 3 million tons. But we're also looking at debottlenecking of the existing currencies similar to what we have done in our value-added business.

So this will all take the total capacity to 3 million tons. That will be existing capacity of around 1.3 million ton to 1.5 million ton and adding the additional capacity to 1.5 million ton.

So, 3 million ton will be the hot metal capacity. We are also adding the value-added product capacity that means steel mill and the tower billet.

The overall plan is to have a value-added product of 90% and the CapEx investment is around the $230 million. So Sauvick, you are also in line.

Anything you would like to add on this?

Yes. So with only one point in the value-added segment, we are also adding the ductile iron pipe.

So presently, we have got around 220,000 tons. So, this total capacity of the ductile iron pipe will go up to almost 400,000 tons.

So that is all I wanted to add. Thank you.

So all in all, we are looking at the rough capacity of more 90%.

Understood. Understood.

And Mr. Duggal, if I may just ask one more question.

With respect to the BALCO expansion, in the presentation, it is written that the value added will increase to 90%. So what is the planned contributions you're adding?

Is it just working smelters you're adding? Or there's some downstream at BALCO?

We are adding 100% downstream of billet. It's a more than 100% capacity, along with this smelter capacity addition that is a broad addition.

More than 100% of that will be converted into well, and that is billet capacity.

Thank you. Just on the BALCO expansion, you would mention that the total CapEx would be -- I mean, the total -- the number CapEx will be in the range of $1.8 billion to $2 billion, which has not changed from earlier.

So how should we apportion this CapEx for the new BALCO announcement? And when can we expect production from this smelter?

That's one. And second, is there any update on the Supreme Court ruling on the Hindustan Zinc stake?

So on BALCO expansion, this CapEx will be completed in 18 to 24 months' time. And the overall guidance for the current year will remain around $2 billion, maybe $200 million of the cash flow could happen.

But for the next year, depending on what cash flow will be there next year, we will be coming back and giving the guidance in the coming quarters. On Hindustan Zinc disinvestment, this investment, the date has not been fixed as yet.

But we believe that whenever the debt will be fixed, now the courts are opening up, that could be the last hearing.

My question was with regards to the green metals that you mentioned. You're saying that we would be expanding [indiscernible] capacity by 400,000 tons.

How would that translate into a green aluminum? Because I understand our bulk of power would still be coming from captive coal mines?

I don't know what green you are reading. The green metal, we are taking the pilots in all of our operations where we want to convert a part of our production in being steel, aluminum, every business to the green metal.

That means we want to source the power for that pilot through the renewable power and all measures or all other initiatives we want to take to brand this metal as the green metal. So this is only a pilot project we are taking.

And the pilot will be kept at how we have to scale it up to the full volume. So as we speak, we are making a strategy and preparing ourselves to declare our strategy for making our operations carbon-neutral or how shall we progress in 2030, 2040 and 2050, in which we will convert all our energies to the renewable energies.

But beyond that, what are the other ESG measures we are taking and how the journey will be traversing over the next few years. So a complete plan and a public declaration, we will be making in a month of October.

That's quite an elaborate answer for it. Sir, my second question was again with respect to the BALCO expansion.

You mentioned that we would be doing 100% or more than that on the VAP. So would we be stopping at wire rods?

Or we are planning further value-add products like extrusion products or something more than that?

No, we will make billet only.

In that 400 kt, it would end at billets only?

Yes, that's right. The exclusion will be done by somebody else.

As of now, we are not talking of any experience on billet.

Yes, thank for taking my question. Sir, I want to take on your priority for capital allocation.

So we're going to have a very strong year of cash generation. So as I understand, you said like INR10,000 crores CapEx would be our first priority.

And then to what extent do you want to upstream cash to your parent? Like what is -- I can read you have total parent the term that is around $3.7 billion.

So how should we look at your entire capital structure?

So our policy on allocation of capital is quite consistent, and you have these kind of priorities and strategy will not change quarter-on-quarter. So, on an entire strategy, we have done three strategic priorities.

The first and the foremost remains as deleveraging and some part of it, we have seen in the current quarter, deleveraging by almost 1 billion if you look at numbers Y-on-Y. Second year remains growth CapEx.

Again, you may have seen 1.2 billion the current year estimation. And the bulk of today announcement, it is in the same direction.

Third is how do we create value overall. So these three are the priorities and they are not necessarily either/or.

Now deleveraging is both for Vedanta Limited and Vedanta Resources. As you know, the net debt at Vedanta Resources as of June is about 12.5 billion.

Now a significant portion of deleveraging at parent, Vedanta Resources, will be through payment of dividends. Now that can come from, again, two sources: the free cash flow from profitability led by higher volumes and the pricing; and secondly, even leveraging borrowing at the Vedanta Limited payment of dividend for deleveraging at parent is an option.

So deleveraging both Vedanta Limited and VR in the current fiscal is our single biggest priority.

So what is the GAAP number that we're looking at on a net debt basis that is not cross to pay dividend? And by when this kind of dividend are we looking at in one year, two years, three years?

I mean, can you give a timeline for that?

It is hard to give a specific timeline in the payment of dividend that you may have seen in the current quarter hasn't happened. In near future, is it an option that you asked me?

I mean definitely. I think that, that seems quite logical.

But to give some indicative timelines is hard.

No. So looking at a threshold of not going beyond 2x net debt-to-EBITDA or to pay -- keep the dividend, is there any number in mind we have?

We think any leverage around the 2, 2.5x is a good number; and for Vedanta Limited, around one or less than one time is a good number. So that is our normal threshold.

And -- but depending upon the environment, it might change.

Right. Yes.

And also on the expansion on alumina side, so what kind of cost reduction should we expect? And will we get fully integrated and will meet the requirements of BALCO as well?

Yes. So it will contract to the requirement of BALCO.

If we see the 5 million ton, the current capacity, we'll be able to produce 2.5 million ton of hot metal. And we are also looking at debottlenecking this to 3 million ton.

And for that, we are also aligning the permission EC for 6 million ton. So, 6 million ton has the potential to produce 3 million ton of metal.

With the capacity addition in BALCO, the total capacity will go up to 2.8 million tons. With the Lanjigarh expansion, it will give you a cost benefit of, say, $50 to $60.

But apart from that, we are able to source the local bauxite from Orissa. We will have a further advantage of, say, around $50.

So the net-net, our vision is, and our ambition is to get a more than $100 benefit from the cost from Lanjigarh expansion.

Right, right. And sir, also, I'm wondering why would you want to expand so much in BALCO, given that a higher level of minority threats.

So would it not priority will it be to ramp up more at Jharsuguda?

No, I think the other advantages are also there. We have a water security.

We have a power security there. We don't have to put our power plant.

So optimize the CapEx and make it more productive, it is all the more important to put up this capacity at BALCO.

Thank you, operator. Thank you, everyone, for joining us today on this call.

Before we wrap up the call, I would like to announce that our integrated annual report for the year 2021 is now live on our website. Please do have a look and let us know your feedback on the same.

If there are any follow-up questions or if there are any clarifications required, you can reach out to the Investor Relations team. Thank you.

Thanks, everyone. Thank you.